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December 31, 2005

Another problem for Milberg Weiss

On my way out the door to attend the Houston Bowl today, I noticed this LA Times article on the latest development in the now five-year criminal investigation of certain of the attorneys involved in the former Milberg Weiss Bershan Hynes & Lerach, LLP law firm for allegedly engaging in a kickback scheme involving a common plaintiff in a number of the firm's class action lawsuits. Prior posts on the Milberg Weiss case are here.

Last week, federal prosecutors attached a potentially troublesome internal law firm memo to a seemingly innocuous objection to Palm Springs lawyer Seymour Lazar's request to end his house arrest. Lazar and his personal attorney, Paul Selzer, were indicted earlier this year for allegedly taking $2.4 million in kickbacks from a "New York law firm," presumably Milberg Weiss. Inasmuch as prosecutors have already given immunity to at least two other former clients who say they received kickbacks from Milberg Weiss, the conventional view is that the Lazar and Selzer indictments are part of an effort to prompt the two defendants to testify against Milberg Weiss and its partners.

Selzer's former law firm -- Southern California law firm Best Best & Krieger -- expressed concerns in the 1994 internal memo that it was acting as a conduit for legally questionable payments from Milberg Weiss to Lazar. The memo expresses particular concern about the Best firm recording payments from Milberg Weiss to Lazar as firm income, which would then be secretly credited to Lazar for future legal services. As the memo notes, "to us it just smells bad, and probably would to an investigator." Selzer left Best Best & Krieger in 1995.

Although the memo is clearly damaging evidence against Selzer and Lazar, it still does not implicate the Milberg Weiss lawyers directly in the scheme without additional evidence or testimony, probably from either Lazar or Selzer. But the price of this poker game -- and the incentive for Selzer and Lazar to cop pleas in return for implicating Milberg Weiss -- is clearly increasing.

Posted by Tom at 8:00 AM | Comments (0) |

December 30, 2005

Bowl game reading

My old friend Coach Mac is in town this week with his Iowa State Cyclone football team to play the TCU Horned Frogs tomorrow afternoon in the EV1.net Houston Bowl at Reliant Stadium. As a result, blogging will be a tad sparse this weekend as I participate in some of the bowl festivities, but I wanted to pass along the following pieces for you to peruse while watching the flurry of professional and college football games over the next several days:

Kerry Packer -- the media tycoon who was one of the wealthiest Australians -- died earlier in the week at the age of 68. Packer was an inveterate gambler in business, in the casinos (where he was known as a generous tipper) and on the golf course, where he frequently played on one of the world's best and most exclusive courses -- his own.

Yesterday was the anniversary of the late and legendary Ohio State football coach Woody Hayes going haywire on the sidelines before a national television audience during a 1978 bowl game.

Banjo Jones detects a bit of editorial glee behind this Forbes article ($) about wealthy Houston plaintiffs' lawyer John O'Quinn being scammed by a trusted employee.

Larry Ribstein is back from a month-long jaunt to Southeast Asia and is talking about why the U.S. government better quit acting like a monopolist in the market for regulating international companies.

Bill Hesson passes along author Michael Crichton's engaging speech to the Washington Center for Complexity and Public Policy entitled Fear, Complexity, & Environmental Management in the 21st Century in which he reminds us of the late David Brinkley's wise observation:

"The one function TV news performs very well is that when there is no news we give it to you with the same emphasis as if there were."

Crichton's speech includes his observations about Chernobyl, the "dead area" around which is the subject of this fascinating picture journal of a Russian woman's motorcycle journey.

Ted Frank passes along this entertaining New Orleans Times-Picayune article about a different kind of flood spawned by Hurricane Katrina -- the lawsuit flood. Among the more entertaining are the lawsuits against the Army Corps of Engineers for damages resulting from the the failed levees despite the fact that the 1927 statute that authorized the Corps to build levees in the first place specifically exempts the Corps from liability. And as between the Corps and private business, guess which is more effective in cleaning up the mess left from Katrina?

Edward Rothstein of the NY Times and Daniel Drezner provide interesting reviews of Speilberg's new movie, Munich.

Finally, P J O'Rourke tells Christopher Bray that he'd rather clean the fridge than write, and also passes along this observation about his conversion from communist to capitalist:

"You see, the real reason I became a communist was to impress girls. Back then, all the pretty ones were revolutionaries. One of the things that's gone wrong for the Left is that their girls just aren't cute any more."

Have a great weekend!

Posted by Tom at 4:52 AM | Comments (0) |

December 29, 2005

Causey pleads to seven years

As expected, former Enron chief accountant Richard Causey pled guilty Wednesday afternoon to a single count of securities fraud while agreeing to a prison sentence of seven years and a fine of $1.250 million. A bookmarked copy of the plea agreement is here, and here are the Houston Chronicle, NY Times (Eichenwald's here), W$J, and Washington Post articles on the plea deal. As a result of the timing of Causey's plea deal, U.S. District Judge Sim Lake postponed the commencement of the Lay-Skilling trial for two weeks to January 30, 2006.

In agreeing to the seven-year plea deal, the 45 year-old Causey took on the second-longest prison sentence of the 16 former Enron executives who have pled guilty to date under plea bargains, less only than former Enron CFO Andrew Fastow's minimum ten year sentence. It's a surprisingly long sentence given that Causey, unlike Fastow, did not peel tens of millions of dollars off of Enron and various special purpose entities for his own benefit. Causey has two years' worth of incentive to be a compelling Task Force witness against his co-defendants Ken Lay and Jeff Skilling because the only way that he can obtain a reduced sentence (to five years from seven) is if the Task Force, in its sole discretion, determines that Causey has been a good helper.

However, unlike most other former Enron executives who have copped pleas, Causey did not sign a cooperation agreement with the Task Force and thus, is not obligated to cooperate with the government. Even though he has two years' worth of motivation to ingratiate himself to Task Force prosecutors, Causey cannot lose his plea deal if the Task Force finds that his assistance is not particularly helpful.

During its almost four year existence, the Task Force has been much more successful in bludgeoning plea bargains out of former Enron executives than in obtaining convictions of such executives at trial -- only one former Enron executive (Dan Boyle in the Nigerian Barge case) has been convicted out of the seven former Enron executives who have defended themselves at trial against a Task Force prosecution. Causey had been facing trial on 36 counts of conspiracy, fraud, insider trading, lying to auditors and money laundering, and also faced a potential, effective life sentence if convicted on all or most of the counts. The securities fraud charge that Causey pled to has a maximum prison sentence of 10 years.

Exhibit A to Causey's plea agreement contains his specific admissions, which reflect that the Task Force is now focusing more on non-disclosure of material facts relating to Enron's financial performance than the allegations of fraudulent accounting that permeate the indictment against Causey. Nevertheless, it remains unclear to what extent, if any, Causey's testimony will be used against Lay and Skilling in their upcoming trial.

Causey's admissions on exhibit A are limited in nature and are based on the generic statement that he participated with "others in Enron senior management" to defraud the investing public by misleading them about the company's true financial performance. However, the affidavit only cites two examples, and they do not involve some of the broader accounting allegations related to Fastow's SPE's that have been the focus of the Task Force's case against Causey and his co-defendants to date. Similarly, the affidavit makes no reference to secret handshake deals involving alleged oral promises (undisclosed to Enron's auditor) to pay back money provided by third parties such as the Task Force parlayed into convictions of Boyle and four former Merrill Lynch executives in the Nigerian Barge trial. Surprisingly, Causey's admissions involve one-time deals that do not, in and of themselves, reflect a management team that was -- as the Task Force contends -- engaged in a conspiracy to hide a house of cards from investors for several years before Enron's bankruptcy.

In one instance, Causey admitted that he and other unnamed Enron executives removed a hedge from a partnership that Enron partly owned and which held Enron stock. Inasmuch as the Enron executives knew that positive news about Enron was about to push the value of the stock upward, the value of a related investment would go down if the hedge was still in place. Once the hedge was removed, Enron reported the stock price increase as recurring profits in the first quarter of 2000, which Causey now contends was improper.

The second Causey admission involves Enron's retail electricity business, Enron Energy Services. Causey admitted that EES -- which he contends was an important promotional tool for Enron to investors -- had hundreds of millions of dollars of unexpected first quarter of 2001 trading losses, which far exceeded the unit's projected income for the year. In order to maintain the unit's attractiveness as a promotional tool, Causey contends that Enron shifted the unit's trading losses into a more profitable unit and thus, avoided direct reporting of the losses that might have chilled investor fervor for Enron.

Finally, inasmuch as Causey and his counsel have participated under a joint defense agreement with the Lay and Skilling defense teams for over two years now, virtually any of Causey's testimony would be subject to challenge as being derived from that joint defense effort. Moreover, as noted in this earlier post, Causey had problems in defending himself against the charges that Lay and Skilling do not, and his credibility may be subject to impeachment at trial through portrayal of the eve-of-trial plea deal as an effort to save his skin at the expense of his co-defendants.

Thus, even though Causey's plea is disconcerting for Lay and Skilling, it remains to be seen whether it really changes the dynamics of the government's case against the two key former Enron executives. As the Task Force debriefs Causey, the nature of his potential testimony will likely become better known over the next couple of weeks.

Meanwhile, in the lottery that has become the criminalization of business in this country, former Qwest Communications International Inc. executive Marc Weisberg agreed yesterday to plead guilty to a single count of wire fraud and will cooperate with prosecutors in Denver who have charged Qwest's former chief executive, Joseph Nacchio, with insider trading. Weisberg had been scheduled to begin trial next week on eleven counts of wire fraud and money laundering for allegedly abusing his position at Qwest for personal gain by using his access to shares of Qwest vendors' initial public offerings to benefit himself, his friends and his family to the tune of approximately $3 million. As did Causey, Weisberg faced decades in prison if convicted on all those counts.

Weisberg's deal? 60 days of home detention, two years probation, a fine of $250,000 and a two-year ban on him serving as an officer or director of a public company.

Posted by Tom at 4:00 AM | Comments (4) |

December 28, 2005

What was that about high natural gas prices?

Remember this post just two weeks ago about natural gas futures contracts settling at an all-time high price over $15 per million British thermal units?

Well, markets have a funny way of reacting to such pinnacles, and the market for natural gas futures has been in a free-fall almost ever since that earlier post. Yesterday, natural-gas futures for January contracts dropped 10% and pushed prices below $11 for the first time on the New York Mercantile Exchange since mid-September before settling at $11.022 per million British thermal units. Prices for January contracts have fallen 23% since Dec. 21 as thin trading and forecasts for mild weather are powerful forces driving the price of contracts downward. Some traders are now predicting that gas-futures prices will fall below $10 after the New Year if above-normal temperatures persist.

Posted by Tom at 6:19 AM | Comments (0) |

Perfected idiocy

Clear Thinkers favorite Holman Jenkins's W$J/Business World column today provides a wonderful analysis of how domestic political demagoguery over Big Oil profits works to enhance fascist control of oil and gas supplies internationally. In so doing, Jenkins tosses the following delicious salvo at David Boies' latest Big Oil lawsuit:

Consider the perfected idiocy of Sen. Maria Cantwell of Washington, who bought her Senate seat with a now-diminished dotcom fortune and has reason to worry about whether voters will find her worth re-electing. This undoubtedly explains her sudden and shrill emergence as the most unhinged of oil-industry bashers.

Last week she was quick to confuse the filing of a lawsuit with proof of guilt, denouncing BP and Exxon because they were named in an antitrust complaint by the deservedly obscure Alaska Gasline Port Authority. Ms. Cantwell was likely impressed by the name of David Boies, celebrity lawyer, as counsel for the plaintiffs. In fact, the AGPA consists of three Alaska municipalities whose plan for a gas liquefaction facility in the port of Valdez was recently rejected by the state as lacking any means of financing.

The group has decided to blame its troubles on BP and Exxon for allegedly sitting on undeveloped natural gas reserves in Alaska in order to drive up prices in the U.S. domestic market. This overlooks the fact that the two companies supply just 12% of the natural gas in the lower 48, so any such manipulation would benefit mostly their competitors.

In reality, the AGPA nakedly exists to divert Alaska's untapped gas wealth into a local construction boondoggle, lacking any economic rationale. Indeed, the mere act of liquefying Alaskan gas and loading it aboard a ship would put the state in competition on absurdly unfavorable terms with far cheaper suppliers of liquefied natural gas in Qatar, Indonesia, Australia, Russia and elsewhere.

In contrast, a pipeline to the Midwest would deliver the gas, without the expense of liquefaction and refrigeration, directly to a large, landlocked market where supply is short and getting shorter. That's why Exxon, BP and a third leaseholder, Conoco, prefer this approach and are prepared to finance it, joined by Alaska's sane governor, Frank Murkowski.

This should be a no-brainer, but the little Putins of the Alaska Gasline Port Authority, cheered on by the silly Ms. Cantwell and the cynical Mr. Boies, are determined to politicize what should be a straightforward economic decision. This is not just bad economics for Alaska. It's an example of increasingly nonsensical policymaking by energy-consuming nations, promoted in the U.S. by kneejerk oil industry critics on Capitol Hill.

Read the entire piece.

Posted by Tom at 5:45 AM | Comments (0) |

Causey plea deal expected today

The Chronicle, the Wall Street Journal ($), the NY Times and the Washington Post began reporting last night that former Enron chief accountant Richard Causey will enter into a plea bargain with the Enron Task Force this afternoon in Houston federal court. The plea deal hedges Causey's risk of an effective life sentence if he were to stand trial and be found guilty on 36 criminal counts in the Task Force's legacy case against Causey and his co-defendants, former Enron chairman Ken Lay and former CEO Jeff Skilling. Earlier posts on the impending plea deal are here and here.

Although the initial news reports speculate that a key part of Causey's plea deal will be his agreement to testify against Messrs. Lay and Skilling at trial, I'll reserve judgment on the probable impact of such testimony until I've reviewed the terms of Causey's cooperation agreement. It is always troublesome for the other co-defendants to have one of their brethen cop a plea on the eve of trial, particularly when the plea bargaining co-defendant has been part of a joint defense agreement with the two other defendants and has participated in discussions both about his defense and the defenses of his co-defendants. But Causey has always been the most likely of the three to cop a plea, both for financial and tactical reasons. In fact, the latest Task Force initiative to pressure Causey into plea bargain negotiations began months ago in regard to Causey-approved accounting over a transaction called Coyote Springs (here and here) that does not appear to involve either Lay nor Skilling. That pressure was reinforced earlier this month when the Task Force threatened more indictments over the Coyote Springs transaction. Ellen Podgor has additional thoughts on the possible reasons for the late timing of Causey's plea deals.

On the tactical side, Causey was far more involved than either Lay or Skilling in the details of questionable accounting in regard to certain transactions between Enron and special purpose entities effectively run by former Enron CFO, Andrew Fastow. An apparent "side" agreement between Causey and Fastow relating to those SPE's that allegedly was not disclosed to Enron's auditors has long been considered a key element in the Task Force's case against Causey. Lay and Skilling have both denied any knowledge of that Causey-Fastow side deal at the time they were running Enron.

Similarly, over the past couple of months, the Task Force has signaled a change of trial strategy that did not bode well for Causey, in particular. The Task Force had previously demonized former Enron auditor Arthur Andersen, alleged in previous Enron-related prosecutions that a number of the firm's former partners were co-conspirators with the defendants and prosecuted the firm out of business. However, the Task Force recently embraced several former Andersen partners as prosecution witnesses in the upcoming trial against Lay, Skiling and Causey on the theory that Enron duped Andersen just like everyone else. Inasmuch as Causey had primary responsibility for Enron's accounting, that change in prosecution strategy impacted Causey more than either Lay or Skilling.

Finally, because the government froze his assets upon his indictment, Causey was not able to pay compensation to his criminal defense attorney (Reid Weingarten) that would normally be expected in a case of this size and complexity. As a result, Causey's defense team has been forced to ride the coattails of both Skilling and Lay's defense teams in preparing for trial, which meant that, from a practical standpoint, the particular problems involved in defending Causey were not likely to be at the forefront of the defense effort.

Thus, it is not entirely clear that Causey will be a particularly effective witness on the core charges that the Task Force is pursuing against Lay and Skilling. We have already seen that the prior testimony of a key Enron executive under a plea bargain did not turn out well for the Enron Task Force. In fact, the plea could actually work to simplify the defense of the remaining two defendants by shifting the focus of the trial away from technical accounting issues over which neither Lay nor Skilling had primary responsibility. Moreover, even if Causey ends up testifying as a prosecution witness against Lay and Skilling, the defense will be able to use the eve-of-trial timing of the plea deal and Causey's previous protestations of innocence to impeach the credibility of any such testimony and to present Causey as a witness who -- much like former Andersen partner David Duncan -- copped a plea to hedge the risk of a long prison sentence even though he really does not think he is guilty of a crime. Along those lines, the WaPo article on Causey's plea deal includes the following from a neighbor of Causey:

For friends of Causey, including his next-door neighbor Steve Huey, word of the advanced plea negotiations is bittersweet. They say Causey is devoted to his three children, the youngest of whom is in eighth grade, and is a devout Catholic who helped raise funds for a new church in the Woodlands, an upscale suburb of Houston.

"I don't think Rick has ever believed he did anything wrong," said Huey, who shared a Christmas Eve dinner with Causey and his wife, Elizabeth. "I think that Rick's concern is over the family and what the eventual outcome will be for the family. As you get closer to trial, you start to weigh the options and weigh the odds and the resources the federal government has."

The most probable immediate impact of the plea deal is that the Lay and Skilling defense teams will request a delay of the beginning of the now-scheduled January 17, 2006 trial and renew their request that the trial be moved out of Houston. Although the Lay and Skilling teams have already made a persuasive case that the trial should be moved out of Houston because of extraordinary pre-trial publicity and a Houston jury pool that is clearly biased against Lay and Skilling in regard to Enron-related matters, U.S. District Judge Sim Lake's previous rulings in the case indicate that he will decline to grant either a delay in the trial or a change of its venue.

Posted by Tom at 4:35 AM | Comments (0) |

December 27, 2005

Cleaning up on mopping up Enron

The Washington Post's Carrie Johnson -- who has written more balanced articles on the Enron scandal than her better-publicized colleagues in the mainstream media -- weighs in with this interesting piece today on the process of selling Enron's remaining assets under the liquidation plan that the Bankruptcy Court confirmed in the company's chapter 11 case. Turns out that mopping up on Enron has become very lucrative work:

[T]he lawyers, accountants and turnaround experts who guided the company through bankruptcy have collected or are seeking substantial amounts. Stephen F. Cooper, the corporate executive who served as Enron's interim chairman, wants a $25 million success fee -- besides his $1.3 million salary and extra consulting fees the company paid several of his associates at Kroll Zolfo Cooper LLC.

The law firm of R. Neal Batson, who prepared several reports as the company's court-appointed bankruptcy examiner over an 18-month period, took home $90 million.

Dozens of other professional advisers billed more than $1 billion, making the Enron bankruptcy the costliest ever, said University of California at Los Angeles law professor Lynn M. LoPucki.

Enron's current directors are well compensated for their work, which they say is more akin to a management role than a traditional corporate board position. Each was recruited to handle a specific issue. [ Chairman John J.] Ray, who negotiates with investment banks and others, makes $1.2 million per year. California investment banker and vice chairman Robert M. Deutschman, who helps with valuing and spinning off the assets, collects $420,000. Three other directors, including Latimer, earn $300,000. Stephen D. Bennett, who has a background in the steel industry, monitors costs and budgets. Rick A. Harrington, a former top lawyer at Conoco Phillips, reviews litigation and regulatory issues.

"The immediate cause of the high fees in Enron is the number of professional firms hired to work on the case," said LoPucki, author of a book on problems with the bankruptcy system.

Professor LoPucki's book is noted in this earlier post.

Posted by Tom at 7:14 AM | Comments (0) |

Houstonian is the fitness-conscious traveler's choice

This U.S. Today article rates Houston's Houstonian as the no. 1 hotel in the U.S. for fitness-conscious travelers. The article says the 125,000 sq. ft. fitness facility -- which is just west of the West Loop near Memorial Park and the Galleria -- is "like an amusement park for the fitness-minded."

By the way, guests of the Houstonian also have access to two very good private golf courses that are affiliated with the facility, including the Tournament Players Course at Redstone Golf Club, as well as nearby Memorial Park Golf Course, which is one of the finest municipal golf courses in the U.S.

Posted by Tom at 6:44 AM | Comments (0) |

Gazprom looking for investors

This NY Times article reports on the Russian government's removal of the final restrictions on foreign equity investment in the state-controlled Gazprom, which is Russia's natural gas monopoly, Russia's largest company and the producer of a third of the world's supply of natural gas. Analysts who follow Russian energy markets are predicting that the company will double in value in the next year or two after President Putin signed a decree last week lifting a 20 percent cap on foreign ownership and a prohibition on nonresidents owning shares traded on Russian domestic stock exchanges.

Meanwhile, in case you feel particularly enthusiastic about making that bet, this London Telegraph article reminds us of one of the more knotty risks of investing in Russian companies:

A former top executive in Russian oil giant Yukos, who is wanted by the Russian government to face fraud charges, will not be extradited, a [UK] judge ruled yesterday.

Interestingly, it's a good thing that executive was not an executive for a UK bank doing business in the U.S.

Posted by Tom at 6:30 AM | Comments (0) |

The contrarian Texas billionaire

This earlier post from a year and a half ago checked in on Ft. Worth billionaire Richard Rainwater and his typically contrarian bet on the telecommunications industry. Following on that theme, this recent Oliver Ryan/Fortune article catches up with Rainwater, who continues to live quietly in Ft. Worth with his wife, Darla Moore, the former Chemical Bank bankruptcy-financing star. Rainwater aptly describes his investment strategy as follows: "Most people invest and then sit around worrying what the next blowup will be. I do the opposite. I wait for the blowup, then invest."

Rainwater, who is currently sitting on about half a billion of cash, is refining his contrarian investment perspective:

The next blowup, however, looms so large that it scares and confuses him. For the past few months he's been holed up in hard-core research mode—reading books, academic studies, and, yes, blogs. Every morning he rises before dawn at one of his houses in Texas or South Carolina or California (he actually owns a piece of Pebble Beach Resorts) and spends four or five hours reading sites like LifeAftertheOilCrash.net or DieOff.org, obsessively following links and sifting through data. How worried is he? . . . "I'm long oil and I'm liquid," he says. "I've put myself in a position that if the end of the world came tomorrow I'd kind of be prepared." . . . This is the first scenario I've seen where I question the survivability of mankind. I don't want the world to wake up one day and say, 'How come some doofus billionaire in Texas made all this money by being aware of this, and why didn't someone tell us?'"

Rainwater has had his share of missed bets, although his successful ones far exceed the failed ones. His wife jokingly calls him "Dr. Doom," but he is no crackpot, so take a moment to read the entire interesting piece.

Posted by Tom at 5:24 AM | Comments (0) |

More daunting news for GM

This earlier post on General Motors' descent into a possible (probable?) bankruptcy case speculated that car buyers would be relunctant to make a long-term purchase of an asset from a bankrupt company. Related posts on GM's financial problems are here.

Backing up that speculation is this Autoblog post noting that only 26% of those polled in a recent Directions Research Inc. survey of over 1,000 randomly-selected adults said that they would purchase or lease a new car from an automaker that had gone into the tank. Lower-income buyers said that they were less likely than more affluent buyers to buy a car from a bankrupt automaker as just 20% of those earning under $25,000 a year would buy or lease a car from a debtor-automaker while almost a third of those earning more than $100,000 said that they would do so.

GM appears to be lurching to that most unfortunate position of needing to wash through a reorganization case, but not being in a position to afford the cost of the financial cleansing.

Meanwhile, the "B" word is a prominent part of this recent interview with GM CEO, Rick Wagoner.

Posted by Tom at 5:02 AM | Comments (0) |

December 26, 2005

That sinking Galveston feeling

Don't allow the publication on Christmas Day of this important Eric Berger/Chronicle story entitled "Rising Growth, Sinking Fortunes" about erosion on Galveston Island. Berger, who is the Chronicle's SciGuy, consistently generates many of the local newspaper's most insightful research articles:

GALVESTON - Geology has aligned its forces against this narrow strip of land, causing it to sink a few inches more every decade.

Though subsidence has caused much of the sinking in recent decades, it's not the only culprit. If oceans continue to warm as expected, sea-level rise could cripple much of the island by century's end. And as the waters rise, waves, tides and especially tropical storms will wash ever more sand away.

This might be little more than an academic exercise for geologists and conservationists but for one fact: Galveston Island, with 60,000 residents, is booming. It's impossible to drive along the island's West End without passing construction trucks. Six developers have planned or begun building residential communities.

Unfortunately, this low-lying West End, beyond the reach of the protective seawall, will feel the problems of subsidence, sea-level rise and coastal erosion soonest.

As scientists wrestle with how to protect the island, they are finding matters may be worse than thought. Some think it's time to sound a warning. Unlike in the days before the great hurricane of 1900, Rice University oceanographer John Anderson said recently, this storm's gathering clouds are all too clear.

"What I am afraid of is that people living there will one day look back and wonder why, if scientists knew changes were occurring to the island, they didn't do anything about it," Anderson said.

Stretching 1,000 feet into the Gulf and surrounded by sunny beaches, Pleasure Pier is aptly named. But the name belies a dark secret: Since the 1957 installation of a tidal gauge, the water has risen more than a foot. Over a full century, that translates into 2 feet, 5 inches.

A similar gauge at Pier 21 in Galveston's harbor has measured a 2-foot, 2-inch rise in the water level in the past 100 years.

Read the entire piece.

Posted by Tom at 7:55 AM | Comments (1) |

Comparing urban boondoggles

Tory Gattis asks the right questions regarding Houston's latest proposed urban boondoggle, but it's at least somewhat comforting to know that other cities are pondering even bigger boondoggles.

In Chicago, Mayor Richard Daley is floating a plan to build a new $1 billion dollar domed stadium to attract a second NFL team, the Super Bowl, the 2016 Olympic Games, the NCAA Final Four, and perhaps an unending string of monster truck shows to the Windy City. Brad Humphreys over at the Sports Economist comments on the absurdity of this proposal:

For those with short attention spans, Soldier Field, home of the NFL's Chicago Bears, underwent a $365 million dollar publicly financed renovation in 2002. But someone forgot to enlarge Soldier Field and build a roof during the renovation. Its 61,500 seat capacity is second smallest in the NFL, and too small to host the opening and closing ceremonies at the Olympics.

Daley's plan appears to have a few minor flaws. First, the expansion is news to the NFL, which currently has zero franchises in mega media market Los Angeles and the itinerant Saints franchise to deal with. Second, the plan appears to also be news to the Bears, who might have a vested interest in maintaining a monopoly in the Chicago market. Note to hizzonor: next time check the NFL expansion regs before making plans to acquire a new football franchise.

Of course, part of the justification for this new stadium is - wait for it - a fountain of economic benefits flowing from the proposed facility. According to one of the mayor's aids, among the expected economic benefits flowing from the new stadium would be "thousands of new jobs and new infrastructure." Unfortunately, there is not one shred of evidence that sports facilities generate tangible net economic benefits like more jobs.

In fairness, Houston does have even bigger potential boondoggles than its latest relatively small one, and even has an existing one in the black hole that is Metro. However, at least Houston's pouring of money into that bottomless pit is downright economic compared to the money that Seattle residents are tossing into theirs:

The light-rail system, as now projected, will have far fewer stations, be far shorter, take years longer to build, and cost billions more than originally promised. What experts already knew--that light rail is unsuited to cities where tunneling and water crossings are necessary--is now apparent. Big engineering problems have arisen. Yet [local politicians] have kept big money flowing to the project.

Washington state law provides that transit agencies and regional transit authorities may operate rail service where it is competitive in cost with bus, bus rapid transit and other technologies. . . [however] Both Sound Transit's light rail and its intercity Sounder service have cost far more than alternatives, the prices of which were not presented.

Rail Madness came via ballot measure--the form of direct democracy tailor-made for willful, well-financed single-issue and single-interest coalitions to get what they want. Local law firms, financial institutions, unions, consultants, architects, builders and others who receive project-related public funds have formed a strong alliance with local politicians who keep those rails a hummin'. Taxpayer funds even pay for print and broadcast ads hyping the projects.

While Rail Madness prevails, more urgent transportation priorities are not being met . . .

Can Rail Madness reach those levels in Houston? You better believe it.

Posted by Tom at 7:11 AM | Comments (1) |

What's the deal with Richard Justice?

Chronicle sportswriter Richard Justice -- who still has a difficult time accepting Stros owner Drayton McLane's decision of over a year ago not to retain former Stros GM Gerry Hunsicker -- rarely misses an opportunity to slam McLane and current Stros GM Tim Purpura, even during the Christmas season.

In today's broadside, Justice castigates McLane and Purpura for everything from raising ticket prices to firing former Stros broadcaster Alan Ashby, and then levels the following criticism about the Stros' off-season personnel decisions:

If people keep reminding Tim Purpura he has been on the job 14 months without acquiring a player of consequence, he's going to feel compelled to do something stupid.

Maybe that's why he offered Nomar Garciaparra $6 million. That's a lot of money for a player out much of the last two seasons with injuries. Truth is, a left-field platoon of Luke Scott and Chris Burke might be as productive as Garciaparra.

Maybe that's also why there are reports Purpura would be willing to trade Brad Lidge.

If Purpura had signed Garciaparra, the next move should have been docking him a month's pay. If he trades Lidge, he should be fired.

Money is too tight to throw at a player with a history of breaking down. And trading Lidge would be so monumentally stupid, it's almost beyond discussion.

H'mm, a platoon of the 28 year-old Luke Scott and the 26 year-old Chris Burke might be as productive as the 32 year-old Garciaparra? Let's take a look at their respective career statistics to date:

Scott's career stat line is -6 RCAA; .270 OBA; .288 SLG; .557 OPS.

Burke's career stat line is -15 RCAA; .303 OBA; .352 SLG; .655 OPS.

Garciaparra's career stat line is 247 RCAA; .367 OBA; .544 SLG; .911 OPS, or roughly the same stat line as future Hall-of-Famer Craig Biggio at the same stage of his career.

But Justice never lets knotty little details such as facts get in the way of throwing flames at McLane and Purpura. His criticism about the possible trading of Lidge is equally baseless. The Stros' strength is pitching and the club's weakness is hitting. The trade of Lidge that the Stros have supposedly been mulling has been Lidge and SS Adam Everett to the Orioles for all-star SS Miguel Tejada, whose career stat line is 78 RCAA; .338 OBA; .477 SLG; .815 OPS compared to Everett's -53 RCAA; .305 OBA; .365 SLG; .670 OPS (Everett is a year younger than Tejada). Meanwhile, Lidge was arguably the best reliever in MLB during the 2004 season (26 RSAA), but he tailed off considerably last season (14 RSAA) and has had a history of injuries, which is one of the reasons that Justice thinks that the Stros should not have tried to sign Garciaparra. Maybe trading Lidge from a position of strength in an over-heated market for relievers would turn out to be a mistake -- there is that risk in every MLB transaction. But if a Lidge trade provides an upgrade such as Tejada for Everett at SS, then that is a very attractive deal for the Stros and -- under any reasonable analysis -- certainly not grounds for firing Purpura.

Finally, in closing his column, Justice fires this salvo at current University of Houston basketball coach Tom Penders, who formerly coached at the University of Texas:

Our final question comes from T. Penders, who asks: "How about the way the University of Houston basketball coach is taunting Texas to play him? That's pretty cool, isn't it?"

Yes, very classy. Tom Penders left Texas almost eight years ago, but the place still seems to be on his mind. He might want to consider cutting the cord in the next year or two.

Justice ought to take his own advice to Coach Penders and apply it to himself with regard to Hunsicker. That relationship appears to be clouding his judgment about the Stros.

Posted by Tom at 5:45 AM | Comments (2) |

2005 Weekly local football review

Jaguars 38 Texans 20

The 2-13 Texans got a leg up on the 3-12 49er's in next weekend's Reggie Bush Bowl in San Francisco as the Jags scorched them for 21 points in the final quarter to put this one on ice. The local media was agog over Texans QB David Carr throwing for 295 yards on 29 attempts with a couple of reasonably long TD passes, but he also threw his obligatory tipped-pass-at-the-line-of-scrimmage (largely the result of Carr's defective throwing motion) for an interception, which set up one of the Jags' fourth quarter TD's. Assuming that the Texans don't blow the first pick in the 2006 NFL Draft by beating the 49er's on New Year's Day, the team not only has to decide whether to draft Bush (an easy decision, in my view), but whether to pick up what appears to be a fairly expensive $8 million option on Carr. My sense is that the Texans will probably do so, although the market for free agent QB's will likely have an impact on the decision. Nevertheless, two things remain clear about Carr -- the Texans made a mistake in making him the no. 1 draft pick in team history and he is not good enough to make an offense with a deficient line even average in the NFL.

Cowboys 24 Panthers 20

After having their playoff hopes essentially written off in last week's blowout loss to the Redskins, the 9-6 Pokes used a revived rushing attack and a break on a blown roughing-the-kicker call to get rught back in the playoff hunt. With the victory, the Cowboys are in a position to know their prospects for attaining a wildcard playoff spot before they tee it up with the Rams (5-10) on New Year's Eve night. Earlier that day, both the 9-6 Redskins (at Philadelphia) and the 10-5 Panthers (at Atlanta) need a win to make the playoffs. If either of those teams lose and the Cowboys beat the Rams, then the Pokes will nab the final NFC wildcard playoff spot at the wire.

Kansas 42 Houston Cougars 13

KU manhandled the Coogs (6-6) in the Ft. Worth Bowl on Friday night, limiting Houston to a total of 244 yards, including only 30 rushing yards. Somehow, with five minutes to go in the third quarter of this one, the Coogs were within a TD of tying the game. But KU then hit on a long TD pass and returned an interception for a TD on Houston's next play and, presto, the Coogs were planning for spring practice. Although technically a bowl team, Houston remains a fringe college football program, good enough to win about half of its games with a quirky offense and speedy skill-position players, but woefully undermanned in almost all other phases of the game. Until the Houston program undertakes a systematic upgrading of the talent throughout all phases of the team, the Coogs will continue to struggle in Conference USA, which is not a prescription for an invitation into a BCS conference.

Posted by Tom at 4:46 AM | Comments (0) |

December 25, 2005

The Game of a Lifetime

On this Christmas Day, take a moment to read this heartwarming story (pdf here) about a daughter arranging the golfing gift of a lifetime for a father who gave of his life selflessly, and a member of Augusta National Golf Club who understands the true meaning of giving.

Merry Christmas and thank you for reading Houston's Clear Thinkers.

Posted by Tom at 7:37 AM | Comments (4) |

December 24, 2005

Thinking about the WSJ's Enron conflict of interest

The Chronicle's Loren Steffy thinks I'm stretching a bit in noting the conflict of interest that the Wall Street Journal has apparently decided to overlook in allowing John Emshwiller to report on the upcoming trial of the Enron Task Force's legacy case against key former Enron executives Ken Lay, Jeff Skilling and Richard Causey. Candidly, I don't think the point is a stretch at all. The following explains why.

Along with many others, Emshwiller has promoted the now common theme that Enron was merely a house of cards and that the company's intrinsic instability was hidden from the investing public by a deceitful management team. That view has been readily embraced by a wide-range of societal forces, such as publicity-seeking politicians who don't allow facts to get in the way of demonizing unpopular entreprenuers for political gain, government prosecutors who improperly expand the reach of criminal laws to further their careers, competing businesspeople and lawyers seeking to profit from Enron's demise, and a general public that finds it easy to resent wealthy businesspeople, particularly after the bursting of a stock market bubble. These societal forces believe that they understand the Enron morality play so thoroughly that otherwise thoughtful and intelligent people lose the capacity for independent thought regarding Enron and reject any notion of ambiguity or fair-minded analysis in ferreting out the truth of what really happened at Enron.

Unfortunately, this common view of Enron ignores the more nuanced view of a growing number of business experts who have studied Enron's core businesses and have a far better understanding of Enron's business practices than most of those who have promoted the Enron morality play. In many ways, Enron was an innovative firm, both in its primary business activities and in the ways in which it raised money. Experts in structured finance and derivatives recognize this and have already written extensively about Enron's remarkable innovation (see, for example, Christopher Culp and William Niskanen's Corporate Aftershock: The Policy Lessons from Enron and Other Major Corporate Corporations and Culp's subsequent book, Risk Transfer: Derivatives in Theory and Practice). Even Enron's original purpose in using special purpose entities ("SPE's") -- at least before former Enron CFO Andrew Fastow and henchman Michael Kopper hijacked them -- was sound and creative. With equity owned primarily by investment banks and other financial institutions, the SPE's were initially intended to be private equity funds with completely seperate management from Enron. The main attraction of the SPE's for investors was the funds' preferred right to invest in Enron assets, which benefitted Enron by allowing the company to preserve liquidity and hedge risk.

A side effect of this drive toward innovation was that Enron pushed the edge of the envelope between beneficial innovation, on one hand, and excessively complicated transactions that appear to have been designed to confuse more than to accomplish a legitimate business purpose, on the other. Fastow and Kopper's shenanigans with certain of Enron's SPE's are a good example of the latter type of activity.

Nevertheless, Enron was engaged in mostly legitimate and beneficial financial activities, including energy trading, structured finance and other financing transactions that had literally never been attempted before, and certainly never on the scale that Enron generated them. The societal demonization of Enron contributed substantially to an enormous amount of unnecessary wealth loss as many of the markets for such beneficial and innovative financial transactions shriveled in the wake of Enron's liquidation. Consequently, it is critically important in determining the truth of what happened at Enron -- particularly when the futures of three men and their families are at risk -- to distinguish between Enron's role as a legitimate, innovative company and the fraud that took place. Emshwiller's already published views toward Enron reflect that he is a poor choice to make that key distinction.

In fact, the situation with Emshwillier, the WSJ and Enron is eerily reminiscent of a situation that arose at the Journal almost 20 years ago in connection with Rudolf Giuliani's career-boosting prosecution of Michael Milken. Back then, it was WSJ reporter James Stewart who became the mouthpiece for Giuliani's propaganda campaign that demonized Milken's revolutionary financing techniques that literally unlocked billions in shareholder wealth during the 1980's. Stewart followed up his highly misleading WSJ reporting on Milken with a book that perpetuated the same prosecutorial myths about Milken and utterly ignored Milken's role in the tremendous wealth creation and innovation in financial markets that occurred during the 1980's. Daniel Fischel brilliantly exposed both Stewart and Giuliani's duplicity with regard to Milken in his 1995 book, Payback: The Conspiracy to Destroy Michael Milken and his Financial Revolution. Despite the wise perspective that Fischel provides regarding the grave danger to justice, the rule of law and wealth creation that results from unleashing the power of government against the unpopular businessperson of the moment, precious few of the hundreds of people with whom I have spoken or corresponded regarding the Enron case even know about Fischel's book, much less have read it.

Given the WSJ's experience with Stewart in the Milken debacle, it's at least odd that the Journal appears to be overlooking the high risk that a similar journalistic failure may occur in regard to Emshwiller's coverage of the Lay-Skilling-Causey trial. The warning signs are clearly there -- Emshwiller completely missed on the government's overreaching destruction of Arthur Andersen and has largely ignored the prosecutorial misconduct that has marred the Enron Task Force's handling of all of the Enron-related prosecutions. Perhaps most notably, Emshwiller has said virtually nothing about the outrageous miscarriage of justice that landed four Merrill Lynch executives in jail for doing nothing other than being involved in a relatively small transaction with the social pariah Enron.

So, count me as skeptical that Emshwiller is capable of providing the type of objective reporting regarding the Lay-Skilling-Causey trial that readers of America's leading financial newspaper deserve. The Wall Street Journal can do much better.

Posted by Tom at 6:10 AM | Comments (4) |

December 23, 2005

The integration of the University of Texas football program

When the University of Texas plays USC for the BCS National Football Championship in the Rose Bowl on January 4, 2006, the Longhorn football team will be attempting to win its first undisputed national football title since 1969, which happened to be the last all-white college football team to win the national football championship.

This NY Times article tells the story about the integration of the Texas football program, including the not well-known story of how former Major League Baseball player and manager Don Baylor almost became the first black football player at the University of Texas in the mid-1960's, how former President Lyndon Johnson used to help recruit football players for UT, and the interesting story of Julius Whittier, the first black student-athlete to play football at the University of Texas.

Posted by Tom at 8:27 AM | Comments (0) |

My kind of Econoblog

The Wall Street Journal is running another chapter in its free Econoblog series, and the current installment pits the original Sports Economist Skip Sauer against Sabernomics' John-Charles Bradbury discussing the free agent market in Major League Baseball this winter. Among the many interesting observations from these two sharp experts on the economics of baseball is the following from Professor Sauer on the super-heated free agent market for relief pitchers:

[T]his is the year of the reliever in the free-agent market. And if their contracts are anywhere near full value, that is one heck of an interesting observation. Why, you ask? Because it debunks an age-old claim that is inconsistent with economic analysis. The claim dates back to the origin of free agency, via arbitrator Peter Seitz's decision in the McNally-Messersmith case (like the arbitrator in the recent Terrell Owens case, Seitz was abruptly fired, in his case by the owners). After Seitz's decision, the owners and players both feared for the worst should full-blown free agency emerge in baseball's marketplace. They proceeded to negotiate a collective-bargaining agreement which protected owners' interests (by giving young players limited bargaining power), along with the interests of journeymen, allegedly, by limiting the supply of free agents.

Ever since, we have lived with this notion that an increased supply of free agents would reduce the value of player contracts. But it's not that simple. If I have a youngster with decent upside and a modest contract, my willingness to spend big money for a journeyman free agent is sharply reduced. And to the extent that my endowment of a youngster is moot (let all players be up for grabs through trades between teams, or all players be free agents), the Rottenberg-Coase theorem applies: Competition in the labor market would force teams to pay the full measure of what players are worth to them. Under no circumstances would they pay more than that, so can limiting the number of free agents increase their value on the market? Answer: It doesn't, at least in theory.

But there is always that chance that an economic model is wrong, so it is important that we test it. This year's large number of relievers on the free-agent market lets us do that. According to the age-old claim, this should have a negative impact on their salary. But we aren't seeing that -- if anything, their contracts look relatively generous. Thus, to an economist, this year's market is an especially interesting one. It refutes the age-old claim, and supports an alternative: old-fashioned economic theory. Make the score economics 1, age-old baseball canard 0.

Read the entire interesting discussion. Meanwhile, in other baseball news, it's looking increasingly as if the Stros' future Hall-of-Famer Jeff Bagwell is going to give the 2006 season a go even with his chronically arthritic right shoulder.

Posted by Tom at 6:53 AM | Comments (0) |

Robert Durst's rather odd holiday season

You just never know who you are going to bump into during the holiday season at Houston's famed Galleria shopping mall.

Robert Durst -- the wealthy heir who was acquitted of murder after killing his neighbor, chopping up the body and throwing it into Galveston Bay -- bumped into Galveston state district judge Susan Criss earlier this month at the Galleria. Judge Criss presided over Durst's controversial trial, and ultimately had to be removed from the case by an appellate court after she refused to set a reasonable bond for Durst's release under a plea bargain. Durst is currently back in Harris County jail awaiting a hearing on an alleged parole violation. The following is how Judge Criss characterized for the Chronicle her Galleria encounter with Durst:

Criss said she was Christmas shopping when she saw a familiar figure coming toward her, a man talking on a cell phone.

"I saw him and thought 'Oh, my God,' " Criss said.

As the two met in the mall, Durst was trying to place her, Criss said.

"I know you, I know you," Criss quoted Durst as saying. "And then he realized who I was, and he dropped his phone and it fell apart."

Criss said she didn't know what to say to Durst, so she said the obvious.

"How ya doing, Bob?" she said. "He said he was doing fine."

"I can't believe you stopped to talk to me," Criss quoted Durst as saying.

"What was I going to do?" Criss said. "Run away and scream?"

As the awkward conversation ended, Criss said she started walking away and found herself saying: "Take care of yourself and have a happy holiday."

Posted by Tom at 5:53 AM | Comments (0) |

The Wall Street Journal's Enron conflict of interest

The Wall Street Journal's ($) John Emshwiller reports that former Enron chief accountant Richard Causey is currently negotiating with Task Force prosecutors regarding a possible plea bargain under which he would testify against his former bosses, Ken Lay and Jeff Skilling, in the upcoming Enron legacy criminal trial scheduled to begin in Houston federal court on January 17, 2006. A subsequent WaPo article on Causey's plea bargain negotiations is here and the Chronicle story is here.

The gist of Emswiller's piece is that the Task Force is focusing on statements that Causey made to investigators early in the Enron criminal investigation to the effect that Enron had adequate internal controls in place to limit the risk of Andrew Fastow using his position as both Enron's CFO and as the control person in various special purpose entities doing business with Enron to harm the company. The prosecution contends that Causey's statements to investigators -- as well as Lay and Skilling's similar public statements regarding the controls -- were false and that the executives knew that the controls on Fastow's dual positions were inadequate. The three executives contend that Enron's internal controls were both extensive and reasonable, but that no control can absolutely prevent someone such as Fastow from using his position to perpetrate a fraud on the company if he is intent on doing so.

Frankly, neither Causey's plea bargain negotiations nor Emshwiller's story are particularly surprising. Given that Causey is facing the equivalent of a life sentence if he chooses to defend himself without access to his full net worth in a case in which much of media (including Mr. Emshwiller -- see his Enron book, 24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America) has already concluded that he is guilty, it is understandable that Causey would at least explore all options that would hedge that substantial risk of loss. Likewise, the Enron Task Force has frequently used the media throughout its dubious handling of the criminal investigation of Enron to pressure former Enron executives into questionable plea bargains.

By the way, Emshwiller has already published questionable conclusions about Enron that are clearly adverse to the three former executives. Moreover, through his book, he has a financial interest in seeing that even his most dubious conclusions are confirmed during the upcoming trial. Why on earth is a media publication of the Wall Street Journal's caliber having someone with such an obvious conflict of interest covering the Lay-Skilling-Causey trial?

Posted by Tom at 4:23 AM | Comments (0) |

December 22, 2005

Downtown project taking shape?

This Nancy Sarnoff/Chronicle article reports that a joint venture between executives in a California-based entertainment development company and a Texas real estate fund has made a $20 million purchase of three blocks of prime downtown land bordered by Main, Polk, Dallas and Caroline streets (near Toyota Center) for the purpose of developing a retail, condominium and office complex modeled after the Denver Pavilions project. The nascent Houston project's skeletal website is here.

As an aside, things do appear to be picking up in Houston's east downtown, which includes Minute Maid Park, the George R. Brown Convention Center, the Hilton Americas Convention Center Hotel and the Toyota Center within a few blocks of each other. This Houston Business Journal article reports that a joint venture of Crescent Real Estate Equities Co. has sold the 27 story east downtown building called 5 Houston Center at 1401 McKinney to Wells Real Estate Investment Trust II Inc. for $166 million That price computes to a nifty $286 per square foot, which Crescent claims is a record for such a sale in Houston.

Posted by Tom at 5:59 AM | Comments (4) |

Should have seen this one coming

I have a savvy-investor friend who jokes that he shorts stocks of the company whose CEO is featured on the cover of Forbes magazine each month.

Along those lines, this Wall Street Journal ($) article from February 2004 highlighted the comeback of lavish lifestyles and spending on Wall Street after a period of relative poverty after the bursting of the late 1990's stock market bubble. The article included this excerpt:

A year ago, Bret Grebow, a 28-year-old who runs hedge fund HMC International, was taking cheap flights on JetBlue Airways and keeping a lid on his spending. But his fund's investment portfolio surged nearly 40% last year, and Mr. Grebow says he's confident that the market has regained its footing. So two months ago he bought a new $160,000 Lamborghini Gallardo. He says it was his first "treat" in months.

These days when Mr. Grebow and his girlfriend travel between his Highland Beach, Fla., home and his New York office, he charters a catered plane with a bar, paying as much as $10,000 for the three-hour flight. Last weekend he spent more than $12,000 to fly himself and some friends on a Learjet 55 to the Super Bowl.

"It's fantastic. They've got my favorite cereal, Cookie Crisp, waiting for me, and Jack Daniel's on ice," says Mr. Grebow.

Fast forwarding to today, this NY Times article reports the Securities and Exchange Commission filed a lawsuit yesterday in New York accusing Grebow and his HMC cohort Robert Massimi of operating a Ponzi scheme that bilked investors out of more than $5 million without actually trading on their behalf. The SEC press release on the complaint is here.

Is it just me, or is anyone else surprised that investors give large sums of money to a 28 year-old who drives a Lamborghini Gallardo and publicizes that he eats Cookie Crisp cereal while drinking Jack Daniel's?

Posted by Tom at 5:01 AM | Comments (0) |

The Lord of Regulation is unmasked as a dockside bully

Regular readers of this blog are well-acquainted with my position that New York attorney general Eliot Spitzer's tactics toward unpopular businesspeople are a grave abuse of justice and the rule of law, and this Wall Street Journal ($) op-ed is pretty darn good evidence that my view of Mr. Spitzer is right on target.

John C. Whitehead, former chairman of Goldman Sachs and current chairman of the Lower Manhattan Development Corp., wrote the op-ed about a Spitzer-initiated telephone conversation between the two men earlier this year. The telephone call was prompted by a previous WSJ op-ed that Whitehead had written in April entitled "Mr. Spitzer Has Gone Too Far" in which Whitehead expressed the following observation about Spitzer's defamatory public comments about former AIG chairman, Maurice "Hank" Greenberg:

Something has gone seriously awry when a state attorney general can go on television and charge one of America's best CEOs and most generous philanthropists with fraud before any charges have been brought, before the possible defendant has even had a chance to know what he personally is alleged to have done, and while the investigation is still under way.

According to Whitehead, the day the foregoing op-ed was published, Spitzer called him, and Whitehead describes the conversation as follows:

After asking me one or two questions about where I got my facts, he came right to the point. I was so shocked that I wrote it all down right away so I would be sure to remember it exactly as he said it. This is what he said:

"Mr. Whitehead, it's now a war between us and you've fired the first shot. I will be coming after you. You will pay the price. This is only the beginning and you will pay dearly for what you have done. You will wish you had never written that letter."

I tried to interrupt to say he was doing to me exactly what he'd been doing to others, but he wouldn't be interrupted. He went on in the same vein for several more sentences and then abruptly hung up. I was astounded. No one had ever talked to me like that before. It was a little scary.

Although understandable, it's too bad that Mr. Whitehead was so taken aback by Spitzer's bullying that he could not respond to Spitzer in a similar manner to the way that Sir Thomas More responded to King Henry VIII's henchman Thomas Cromwell when Cromwell attempted to use similar tactics on him during a scene in the wonderful movie, A Man for All Seasons. After Cromwell made his threat, Sir Thomas initiated the following exchange between the two men:

Sir Thomas: You threaten like a dockside bully.

Cromwell: How should I threaten?

Sir Thomas: Like a minister of state. With justice.

Cromwell: Oh, justice is what you're threatened with!

Sir Thomas: Then I am not threatened.

The WSJ has a couple of other interesting items today on Spitzer, including this editorial ($) that disassembles Spitzer's latest dubious allegations against Greenberg. The piece concludes with this pointed observation:

[T]he question the rest of us should ask is whether Mr. Spitzer's habit of publicly smearing individuals while bringing no charges in court is appropriate behavior by any prosecutor, much less one running to be New York's Governor.

But the best of all is this delicious letter to the W$J editor that plays on a point that Ted Frank made earlier this week regarding Spitzer's inaction in the face of the New York transit workers strike:

Strikes by public employees are prohibited under New York State's Taylor Law. And New York State has as its chief law enforcement officer Attorney General Elliot Spitzer, a prosecutor of relentless zeal, unlimited resources and possessed of an almost extrasensory ability to detect wrongdoing. I thought Mr. Spitzer would've have thrown Roger Toussaint and the rest of the TWU Local 100 leadership in jail by now.

Maybe he just couldn't make it in to work this week.

Michael Garrett
Montclair, N.J.

Posted by Tom at 3:52 AM | Comments (0) |

December 21, 2005

That Osteen Family Christmas spirit

You know, it's difficult not having the Joel Osteen Family maid along on those pesky first class trips to Vail to take care of untidiness. The Chronicle story reports the following:

A dispute involving the wife of Lakewood Church pastor Joel Osteen delayed holiday travel plans for a planeload of passengers . . . At least some people aboard the Continental Airlines flight [to Vail, Colorado] were less than pleased after waiting about two hours at Bush Intercontinental Airport while the Osteens left the plane and their luggage was removed, said a woman who witnessed the incident.

"She was just abusive," said Sheila Steele, who said she was sitting behind Victoria Osteen. "She was just like one of those divas."

FBI Special Agent Luz Garcia said the Osteens were asked to leave the jetliner after an "altercation." She said Victoria Osteen "failed to comply" with instructions from the flight attendant. She added that no one was detained. Lakewood Church spokesman Donald Iloff said Victoria Osteen contacted a flight attendant after noticing that a liquid had been spilled on her seat. The spill apparently was not cleaned up to her satisfaction, Iloff said. . .

Steele said Victoria Osteen was upset about liquid on her pull-down tray and asked a flight attendant to have it cleaned. When the attendant, who was carrying paperwork to the cockpit, told her she couldn't do it immediately, Osteen replied, "Fine, get me a stewardess who can," Steele said.

She said Victoria Osteen pushed a flight attendant and tried to get into the cockpit. . . Steele said she and other passengers were upset that they had to wait about two hours while the Osteens' baggage was removed from the plane.

The Vail Daily article on the incident is here, and Laurence Simon has some fun with the incident here. A prior post on the Osteen's Lakewood Church empire is here.

Time for Lakewood Church to buy one of these?

Update: Here is Mrs. Osteen's letter to the Lakewood congregation about the incident.

Posted by Tom at 7:54 AM | Comments (6) |

Your Justice Department at work

In what can only be described as an over-the-top and spiteful request, the prosecutors in the sad case of Jamie Olis requested yesterday that U.S. District Judge Sim Lake resentence Olis to a 15 year jail sentence that is exceeded in its absurdity by only the 24 year sentence that the prosecutors improperly obtained in Olis' original sentencing hearing.

Although the prosecution's brief on resentencing is not yet available publicly, the Chronicle story on the brief reports that the prosecution is holding to the absurd theory that Olis' allegedly criminal actions contributed to a $20 to $50 million decline in the value of Dynegy stock. Meanwhile, because Olis does not believe he did anything wrong and thus, declines to rat on other Dynegy executives, the government ratchets up its proposed sentence to the highest possible level.

The Olis case is proof that the concept of prosecutorial discretion is dead at the U.S. Department of Justice.

Posted by Tom at 7:32 AM | Comments (1) |

Pete Pappas, R.I.P.

Pete Pappas, the patriarch and co-founder of the enormously popular, Houston-based Pappas Restaurants, died this past Sunday at the age of 86.

Mr. Pappas' life is a quintessential Houston business success story. He came to Houston 60 years ago because the city embraces entreprenuers and then became successful beyond his dreams by slowly building a local restaurant empire based on good, reasonably-priced food and efficient, friendly service. It is precisely that kind of spirit and vision that makes Houston such a special place.

Posted by Tom at 6:41 AM | Comments (1) |

More on GM and the "B" word

With the filing of the Calpine chapter 11 case, the word "bankruptcy" is in the news again and it is increasingly being associated with the name "General Motors." Prior posts on the risk of GM's insolvency are here.

GM shares fell to their lowest level since October 1987 yesterday, eventually closing at $19.85, down almost 6% from the previous day's closing price. In related news, Toyota Motor announced that it plans to produce a record 9.06 million cars next year, which is about the same as the 9.1 million cars and trucks that GM plans to make this year. Unfortunately for GM, Toyota will produce the same number of vehicles as GM while operating under far superior financial circumstances. Toyota's $142 billion balance sheet reflects $84 billing in equity (with only a sixth of GM's debt), while GM's $480 balance sheet includes only $28 billion in equity. Just to put the icing on this very bad GM cake, the United Auto Workers union this week is preparing to send a letter to GM retirees informing them that GM faces a "serious risk of bankruptcy" if it doesn't obtain relief from burdensome health care costs.

Meanwhile, this Business Week article provides a good overview of what can be expected if GM elects to reorganize under chapter 11. Although certainly not an inviting prospect, GM does not appear to have many other options. Absent attractive government financing, it is highly unlikely that a foreign competitor such as Toyota would want to upset its vastly superior financial condition and operating culture by acquiring an inefficient behomoth with $300 billion in debt. And even with such government financing, a merger partner probably not want to take on the GM acquisition without cleaning up its balance sheet under a chapter 11 plan. Despite its poor overall financial condition, GM does have a reasonably strong liquidity position, so that puts the company in a decent financial position for launching a chapter 11 case.

Nevertheless, a GM bankruptcy involves enormous risk. Consumers are understandably relunctant to make a long-term purchase of an important asset from a company that is mired in bankruptcy. Stated simply, can the GM brand survive bankruptcy? Stay tuned.

Posted by Tom at 5:57 AM | Comments (1) |

The economic ripples of Refco hit Thomas H. Lee Partners

The fallout over the demise of commodities trader Refco reached the private-equity firm Thomas H. Lee Partners yesterday as its founder and chairman, Thomas H. Lee, departed the company to set up his own rival private-equity firm (W$J article here). Previous posts on the Refco case are here.

Over the past several years, Mr. Lee has taken a lessened role in Thomas H. Lee Partners' business as a three person board has managed the firm. However, Mr. Lee's break with the firm comes just weeks after the firm's $500 million investment in Refco during 2004 became essentially worthless as the commodities-trading company collapsed in an accounting scandal earlier this fall.

Mr. Lee's move is occurring at a volatile time for private-equity industry, which is really an outgrowth of the financing techniques that Micheal Milken and investment bank Drexel Burnham developed in the 1980's to spur realization of shareholder value. Private-equity investors purchase controlling stakes in companies on the bet that the value of the stake will increase, often in connection with a public offering. As a result, private equity firms are accumulating huge pools of cash to invest and some of bigger firms now control companies that generate aggregate revenue that is on par with some of the largest U.S. conglomerates. Nevertheless, as more money flows into these private equity firms, the competition for the good prospects increases, which means that more mistakes -- such as Thomas H. Lee Partner's ill-fated investment in Refco -- are more likely to occur.

Posted by Tom at 5:05 AM | Comments (0) |

Calpine tanks

In a widely-anticipated move, Calpine Corp. filed a chapter 11 case the Southern District of New York yesterday (I'll bet getting a case of that size filed during the N.Y. transit strike was fun) to restructure over $17 billion in debt that the company incurred in attempting to become the largest power generator in the U.S. An earlier post on Calpine's troubles is here.

Calpine has lined up investment banks Credit Suisse First Boston and Deutsche Bank AG to provide up to $2 billion in debtor-in-possession financing at favorable rates, fueling creditor hopes that the company will be hold on to its profitable power plants in the better wholesale energy markets, such as California and Texas. Nevertheless, it is anticipated that the company's plan will involve selling a substantial number of less profitable plants. The company has about $27 billion in assets and presently employs about 3,300 people.

As noted in the earlier post, Calpine spent huge amounts of money building power plants in the late 1990's when deregulation of retail electric markets was all the rage in the power-generation business. The company's plan was to become the biggest player in furnishing electricity to utilities that were exiting the power-generation business while also selling power on the open market through auctions. However, the demise of market-maker Enron Corp in late 2001 hammered the energy trading industry, which increased financing costs for the entire industry.

Although most power-generators pulled back and cut losses in the deteriorating market, Calpine persisted in its expansion plan by incurring even more debt. As a result, Calpine's liquidity has been gradually strained over the past several years by increasing financing costs and the steadily increasing price of natural gas, which is the primary fuel for its power plants. But when a court ruled last month that the company could not used over $300 million in proceeds from an asset sale to buy natural gas for some of its power plants, Calpine no longer had sufficient liquidity to maintain operations outside of chapter 11. Just to give you an idea of the burden of Calpine's debt load, the company reports over half a billion in bond principal maturities in 2006 and almost $2 billion in 2007.

Posted by Tom at 3:59 AM | Comments (2) |

December 20, 2005

Where is the Lord of Regulation when you really need him?

Ted Frank asks that salient question in regard to the New York City transit workers strike.

Or does such an action not meet Spitzer's lofty standards?

Inquiring minds want to know.

Update: On second thought, maybe Spitzer isn't needed, after all.

Posted by Tom at 7:55 AM | Comments (0) |

More criminal charges in Brown Administration corruption probe

The now three year-long criminal investigation into corruption of the City of Houston administration of former Houston Mayor Lee Brown turned another page yesterday as this Southern District of Texas U.S. Attorney press release reports that federal authorities have charged Atlanta, Ga. businessman, Floyd Gary Thacker, with mail and wire fraud charges. Dan Feldstein's Chronicle article on the indictment is here, and previous posts on the criminal probe into Brown Administration corruption are here.

The implication of the form of the charges against Mr. Thacker -- a criminal information rather than a grand jury indictment -- is that Thacker is cooperating with prosecutors in the probe. Thacker is accused of bribing former Brown Administration director of building services Monique McGilbra with thousands of dollars in cash and gifts in return for favorable treatment in regard to a city energy services contract. Thacker's company designed the energy saving system for the city, but the Bill White Administration ultimately canceled Thacker's contract in 2004 and paid Thacker liquidated damages of $202,000.

Posted by Tom at 6:19 AM | Comments (0) |

Walter Mischer, R.I.P.

Walter Mischer, one of Houston's best-known real estate developers and banking investors over the past generation, died yesterday at the age of 83 after a long illness. The Houston Chronicle story on Mr. Mischer's life is here.

Mr. Mischer's most interesting venture was his acquisition in the 1970's of the town of Lajitas, near the Big Bend National Park on the southwest Texas border with Mexico. Mr. Mischer initially planned to develop Lajitas into a Palm Springs-type resort, but the remoteness of the location ultimately undermined that plan. Nevertheless, Lajitas over the years has developed into a unique getaway spot in one of the most beautiful areas of the nation.

Posted by Tom at 5:20 AM | Comments (0) |

Ed Prescott on playing politics with tax rates

2004 Nobel Laureate Edward Prescott is a Clear Thinkers favorite, and his work on Social Security reform reflects (here and here) a remarkable ability to present economic principles in a clear manner. In this Wall Street Journal ($) op-ed, Mr. Prescott criticizes playing politics with tax rates on capital gains and dividends, and -- in so doing -- provides this astute reasoning on the adverse economic effect of taxation:

So what are good tax rates? It's useful to begin with consideration of a simple principle: Taxes distort behavior. From this powerful little sentence comes the key insight that should inform our thinking about setting tax rates. Any tax, even the lowest and the fairest, will cause people to consume less or work less. Taxes that are inordinately high only exacerbate this reaction, and the aggregate accumulation of these individual decisions can be devastating to an economy.

Good tax rates, then, need be high enough to generate sufficient revenues, but not so high that they choke off growth and, perversely, decrease tax revenues. This, of course, is the tricky part, and brings us to the task at hand: Should Congress extend the 15% rate on capital gains and dividends? Wrong question. Should Congress make the 15% rate permanent? Yes. (This assumes that a lower rate is politically impossible.)

These taxes are particularly cumbersome because they hit a market economy right in its collective heart, which is its entrepreneurial and risk-taking spirit. What makes this country's economy so vibrant is its participants' willingness to take chances, innovate, acquire financing, hire new people and break old molds. Every increase in capital gains taxes and dividends is a direct tax on this vitality.

Americans aren't risk-takers by nature any more than Germans are intrinsically less willing to work than Americans. The reason the U.S. economy is so much more vibrant than Germany's is that people in each country are playing by different rules. But we shouldn't take our vibrancy for granted. Tax rates matter. A shift back to higher rates will have negative consequences.

Read the entire piece.

Posted by Tom at 4:33 AM | Comments (0) |

Tapping resentment to get a deal

For many years, the State of Alaska has been trying to persuade Exxon Mobil Corp. and BP PLC to invest with the state in a natural gas pipeline that would be built from the North Slope Oil Field to Valdez in the southern part of the state, where the companies' natural gas would be liquefied and loaded onto tankers. But BP and Exxon Mobil prefer an alternative, longer pipeline over which they would own a larger share that would run through Canada to the Midwest. According to the companies, such a pipeline would deliver the natural gas directly to markets and be less risky than the state's proposal. As a result of the disagreement between the state and the companies, there is currently little natural-gas production generated from the North Slope even though U.S. natural-gas prices are soaring.

So, what's Alaska to do? Compromise and cut a deal with the owners of the natural gas? No way, not when the state can hire David Boies to come up with an implausible lawsuit against the companies (W$J article here) that plays on the public's resentment of greedy capitalists.

Let's see if we have Alaska's lawsuit right. Exxon Mobil and BP, which generate less than 10% of the U.S. natural gas production, are refusing to enter into the pipeline deal that the state favors (and which might make the companies more money now, but maybe not) because the price of natural gas in the future will probably be higher than it is now. Thus, the companies prefer to "warehouse" their gas for the time being so that they can make more money in the future than they would make now.

That's a lawsuit? Sounds as if Exxon Mobil and BP are making either a good or bad business decision to me (too early to say how it will turn out), but that should not be the basis of a lawsuit. Unless, that is, the purpose of the lawsuit is to punish those companies for having the right to make that decision in the first place.

Posted by Tom at 3:44 AM | Comments (2) |

December 19, 2005

Economic ripples from the tax subsidy for employer-based health insurance

Following on prior posts here, here, here and here, this NY Times article addresses the unhealthy economic effect of the favored tax treatment of employer-based health insurance. As opposed to individual health insurance policies, employer-based health insurance is a tax deductible expense of the employer and employees are not required to report the economic benefit of that policy as taxable income on their individual returns. The amount of the subsidy (in foregone tax collections) is about $150 billion and is expected to increase to $180 billion by 2010. As Harvard economist David Cutler notes: "If you had $150 billion to play with, you could come very close to universal coverage."

Nevertheless, making employed taxpayers pay income tax on the value of their employer-based health insurance would be enormously unpopular politically, and the Times article reports that MIT economist Jonathan Gruber sees other problems as well:

As soon as the tax break was eliminated, company-provided health insurance would be likely to disappear, too. So some mechanism would be needed to pool groups of people and to avoid leaving higher-risk people to face enormous insurance costs. Such a mechanism would probably make health insurance affordable for all. And to make it universal, a mandate would be needed to make people buy it.

This isn't communism. The changes could happen under a public health care system or one that is privately run.

Despite the knotty political problems involved in ending the tax subsidy for employer-based health insurance, the article notes the clear benefits from doing so:

[T]he fiscal incentive isn't helping many of the people who need it most. A report by the Kaiser Family Foundation says two-thirds of the 45.5 million Americans who lacked health insurance in 2004 earned less than twice what the federal government defines as poverty. (For a family of four, the poverty line is about $19,300.) In four of every five cases, the uninsured made less than three times the poverty level.

In addition to going to the wrong people, the subsidy as designed promotes wasteful medical spending, encouraging the wealthy to buy more insurance and to use more health services than they need, according to the president's tax panel. And it may bolster premiums across the board.

Altogether, the health insurance tax break exacerbates America's medical dystopia: while the nation has the highest per-capita spending on health in the world - about $5,400 in 2002 - 18 percent of the population under 65 remains uninsured.

Read the entire article.

Posted by Tom at 6:30 AM | Comments (2) |

An incredible story about webcam porn

NY Times reporter Kurt Eichenwald -- best known for his coverage of the Enron scandal for the paper and his book on the scandal, Conspiracy of Fools -- pens this remarkable Times article, which tells the incredibly sad story of Justin Berry, a teen-ager who was seduced by online pedophiles.

At the ripe age of 13, Justin began attracting online pedophiles by performing on his webcam and he subsequently made hundreds of thousands of dollars over the next several years by performing online. In researching the story, Eichenwald met Justin and persuaded him to get off of drugs, to shut down the online business, and provide to the government names and credit card information on about 1,500 people who paid him to perform on his webcam.

This is one of those stories that stays with you for a long time.

Posted by Tom at 5:47 AM | Comments (1) |

Did you hear the one about the Aggie who invested in the cattle research scam?

It looks as if a number of wealthy Aggies have had an Aggie joke played on them.

This Southern District of Texas U.S. Attorney's office press release (newspaper report here) reports that a Bryan woman has been indicted on mail and wire fraud charges after the woman allegedly portrayed herself to investors as a postgraduate A&M student studying cattle reproduction at the university. Based on her supposed position as an A&M grad student, the woman promoted a number of Aggie investors to purchase bogus cattle as a part of an alleged grant-funded genetics research program at the university. The woman would raise $600 per head of cattle from the investors on the promise that she would use the invested funds to buy cattle from one of four Texas ranches, including the venerable King Ranch. Then, after nine months of "research" at A&M, the cattle would be sold back to the ranches for $1,000 per head, with $400 of that sales price coming from a research "grant" funded by A&M and the four participating ranches. After she pocketed a $100 fee for "tax purposes," the woman would tell the investors that they would make a $300 per-head profit on each resale of the cattle. Remarkably, the woman was able to promote the dubious deal for almost three years.

As with all investments that violate the tried and true "too good to be true rule," the research program was nonexistent, the cattle were bogus, the woman was not an A&M student and she is currently a defendant in civil lawsuits by investors seeking over $5 million. She faces 26 criminal counts, each of which carries a possible punishment of up to 20 years in prison and a $250,000 fine.

Meanwhile, there is no truth to the rumor that the A&M administration -- as an accomodation to the defrauded investors -- is attempting to schedule a special screening of the new movie, The Producers. Hat tip to Peter Henning for the link to the U.S. Attorney's press release.

Posted by Tom at 5:05 AM | Comments (0) |

December 18, 2005

2005 Weekly local football review

Texans 30 Cardinals 19

Now that we know that the Texans' draft picks are not all that bad, the Texans (2-12) went out and set up a January 1st "Reggie Bush Bowl" in San Francisco against the 49ers by beating the equally hapless Arizona Cardinals (4-10) on Sunday afternoon at Reliant Stadium. The Cardinals QB Kurt Warner was hurt early in this one and the team's second team QB (Josh McCown) came down with the flu during the game. So, the Texans were able to play most of the game against the Cardinals third-team QB John Navarre and were able to pull this one out despite gaining 63 yards in the second half. Texans fourth year QB David Carr continues to look basically clueless as he threw for a total of 134 yards passing on 33 attempts while coughing up two turnovers, which was basically the only possible way the Texans could lose this game. Oh well, at least the win makes the Texans' season-ender against the 49er's -- who will probably also have only two wins as of that game -- something to watch on New Year's Day.

By the way, I know the Texans' management blew it badly by having the roof open at Reliant Stadium for the Steelers game earlier this season, but who one earth decided to close the roof for the Cardinals game on a gorgeous late autumn afternoon in Houston?

Redskins 35 Cowboys 7

In a game that was not as close as the score indicates, the Cowboys (8-6) got blown out for the first time this season in a game that probably ends the team's flirtation with the playoffs for this season. The Pokes were Texans-type bad in this one as Cowboy QB Drew Bledsoe had three interceptions and a fumble while being sacked seven times, and the rest of the Pokes committed an appalling nine penalties, including three false starts by three different linemen on the same drive. With the victory, the Skins (8-6) hold the tiebreaker over the Pokes for a possible wildcard playoff spot with games at home against the division-leading Giants (10-4) and at the demoralized Eagles (5-9). The Cowboys final games are at Carolina (10-4) and at home against the Rams (5-9), and it the Pokes win them both, they still have a -- albeit very long -- shot at a wildcard playoff spot, but it's beginning to look as if the Cowboys can begin the process of shoring up their offensive line during the upcoming off-season. By the way, while they are at that task, perhaps they could explor what has happened to the Cowboys rush defense over the past several games.

Posted by Tom at 7:04 PM | Comments (2) |

Evaluating Charlie Casserly's draft picks

Over the years, I have been blessed to have had the opportunity to represent several professional and major college football coaches in their contract negotiations and related legal matters. Through that experience, I have become friends with quite a few coaches and personnel experts in both professional and major college football.

As noted in this earlier post, I have been disappointed in the local sports media's (with the notable exceptions of the Chronicle's John Lopez and talk radio host Charlie Pallilo) lack of evaluation of the Texan GM Charlie Casserly's personnel decisions, I decided to ask a friend with extensive experience in evaluating college and NFL players to review and assess Casserly's Texan draft picks. My friend graciously agreed to do so, and his final evaluation contains some surprising and interesting observations.

First, a note on the format of the evaluation. My friend categorized the 38 Texan draft choices over the past four NFL drafts into three categories -- good , decent (neither good nor a bust), and bust (i.e., bad). Moreover, my friend further broke down the draft picks into two further categories -- (i) draft picks chosen in rounds one through four of the NFL draft, and (ii) draft picks chosen in rounds five through seven. "A GM should have a better batting average in rounds one through four because those picks should generate a solid NFL player at least three out of four picks," reasoned my friend. "Rounds five through seven are more of a crapshoot, so the batting average is usually lower. If a GM picks an NFL-quality player in half of his picks in the latter rounds, then he is doing an average job. Picking more than that reflects someone who knows what he is doing."

Second, my friend is no fan of Casserly, who he has dealt with professionally. "An arrogant know-it-all," my friend observed about Casserly. "He is obsequious to people from whom he can benefit (such as owners and reporters), and insufferable to everyone else."

Despite his dislike of Casserly, my friend believes that Casserly has done a reasonably good job for the Texans in choosing players in the NFL draft. Of the 38 total picks, my friend concluded that Casserly chose 26 players (68%) who are either good or decent NFL draft picks, and 12 (32%) who were busts. 13 of the 38 picks (34%) were good ones and 13 were decent. "I would prefer to see a higher percentage of good picks, closer to 50%," commented my friend. "But making good picks 68% of the time in the NFL draft is certainly above-average and actually pretty darn good."

Of the 19 total picks in the first four rounds of the draft, my friend concluded that Casserly had 7 (36%) good picks, 9 (52%) decent ones and only 3 busts. "I would prefer to see the number of good and decent numbers switched," noted my friend. "But making good or decent picks 88% of the time in the first four rounds of the NFL draft is well above-average."

Similarly, my friend was impressed with Casserly's selections in rounds five through seven. Of those 19 picks, my friend concluded that 6 (32%) were good and 4 (21%) were decent. "Hitting on 53% of the players in those rounds is above-average," observed my friend. "And hitting on 6 good players in the 19 picks in those latter rounds is very good."

Several of my friend's observations on specific picks were also quite interesting. For example, on Jason Babin (LB 2004 first round), Seth Wand (OT 2003 third round) and Travis Johnson (DL 2005) -- all of whom are often cited as Casserly "bust" picks -- my friend disagreed and characterized each of them as decent picks, at least at this point in the evaluation process.

"Babin started and played reasonably well as a rookie, and then he has been injured while learning a new system in his second season," my friend noted. "He may not be a star, but he can still develop into a solid NFL starter."

As for Wand, my friend observed: "He's a small college player who has been pushed too fast at this level. That doesn't mean he won't eventually become at least an average NFL player."

With regard to Johnson, my friend pointed out that his inconsistent play this season is at least partly attributable to being thrown into a poorly-organized defensive unit that is just now adjusting to the change from the 4-3 to the 3-4 defense. "He's not Reggie White," my friend chuckled. "But it's way too early to characterize him as a bust."

So, why don't the Texans have enough good players? "Well, I haven't analyzed Casserly's free agent and trade transactions, so those certainly could have something to do with that," observed my friend. "But remember, quality depth is built up over time and the Texans are still a young franchise. Wand is a good example. He was a decent pick, but he is a project and thus, might not have been the best fit for a team such as the Texans that needs players who can play at the NFL-level as soon as possible."

And what about the Texans' coaching? "I do not see an overabundance of players who appear to be developing at an above-average rate, particularly in the lines," commented my friend.

So, should Casserly be fired or retained? "I have only analyzed his draft picks, which is only one factor to consider in answering that question," replied my friend. "The issue of whether Casserly should be retained or fired includes a number of other factors, such as his free agent and trade acquisitions, how well he supports the coaching staff, the management of the scouting staff, and the manner in which he has handled personnel problems."

"One thing that would concern me if I were Bob McNair," my friend went on to observe. "Is that the Texans' main problems going into the past three seasons have been protecting the passer and rushing the passer. Going into next season, the Texans' main problems are protecting the passer and rushing the passer, and now they don't even stop the run very well. The failure to address those problems is a valid criticism of Casserly."

"But if you are going to fire Casserly," concluded my friend. "Do it for reasons other than his draft choices. In that particular area, he has done a pretty decent job."

Posted by Tom at 11:41 AM | Comments (6) |

Get ready for the inevitable public money request for the Astrodome redevelopment project

Following on this post from earlier this year, this Bill Murphy/Chronicle story updates developments in regard to the seemingly delusional plan to convert the Astrodome into a Gaylord Texan-type one-stop destination hotel for conventioneers and their families.

Astrodome Redevelopment Co., the developer of the project, envisions a 1,200-room hotel, a winding indoor waterway with small tour boats, mill wheels, walkways and lush landscaping. The developer is currently finalizing its redevelopment plan and a letter-of-intent to be delivered to the Harris County Sports & Convention Corp. next month. If Harris County signs off on the letter of intent, then the developer would attempt to secure financing for the half-billion dollar project, not an easy task in Houston's already soft hotel market that includes a relatively new 1,200 room downtown convention center hotel that has had anything but robust occupancy. At the same time, the developer will probably look to obtain a substantial financing subsidy from Harris County in the form of a long-term lease on the facility.

Frankly, the public money request is almost inevitable because the typical private market for such projects -- companies such as Disney, Universal Studios, Six Flags, Clear Channel and Anschutz Entertainment, and local entertainment czar Tilman Fertitta -- has already passed on participation in the Astrodome hotel deal. Consequently, there is little reason to think that Astrodome Redevelopment Corp. -- whose owners have virtually no experience developing or running a Gaylord Texan-type convention hotel -- will have any better luck in arranging private financing for the project.

Meanwhile, a host of other logistical problems would have to be worked though before such a project could become a reality, not the least of which would be to coordinate parking between the hotel project, the Reliant Center Convention Center, the Houston Texans football team, and the Houston Livestock Show and Rodeo. Can you imagine the warm and fuzzy feelings that guests would have for the Astrodome hotel after having to negotiate traffic around the Reliant Center complex during the Rodeo, a Texans game, a big concert at Reliant Stadium or a big convention at Reliant Convention Center during their stay at the hotel? A facility such as the Gaylord Texan never has to deal with such headaches and has the advantage of being just up the road from an airport (D/FW) into which guests can fly in from around the country. Although the Dome is reasonably close to Hobby Airport, it's not as easy for most out-of-state guests to fly into Hobby as it is far off Intercontinental, which is an hour away from the Dome under the best of traffic conditions.

Accordingly, hold on to your pocketbooks as the details of this deal play out over the next year. Not much takes place in the Dome anymore as the County has decided that it is uneconomic to put down the playing field anymore for high school football games. Nevertheless, it costs the County about $1.5 - $2.0 million annually just to keep the Dome open for the Rodeo and the occasional dinner party or bar mitzvah on the Dome floor, and it would cost about $600,000 a year just to mothball the facility. Even demolition of the Dome would probably cost at least $10 million. That's a lot of money, but its nothing like the cost of dealing with a huge failed hotel project. Just ask the City of Houston.

Posted by Tom at 5:34 AM | Comments (0) |

December 17, 2005

Why didn't Bob McNair consider Ditka?

I wonder if this is the reason why Texans owner Bob McNair didn't consider former Bears and Saints coach Mike Ditka before hiring Dan Reeves as a consultant to evaluate the state of the Texans?

Ah, the indiscretions of our youth. Hat tip to Eric McErlain for the Ditka link.

Posted by Tom at 8:42 AM | Comments (0) |

The Onion's top sports stories of 2005

The Onion includes several Texas-related entries in its satirical end-of-the-year list of the top sports stories of 2005:

Apr. 5—The Baylor women's basketball team defeats Michigan State to win the NCAA women's championship, showing the nation and their own university what a Baylor team can do when it works hard, plays as a team, and does not conspire to murder one another.

Dec. 11—The Houston Texans, searching desperately for a way to improve and threatened by the potential for awfulness displayed by the Green Bay Packers, voluntarily forfeit the remainder of the 2005 season in order to draft Heisman Trophy-winning running back Reggie Bush of USC.

Dec. 12—USC Trojans running back Reggie Bush announces that he has done much soul-searching and has decided to stay in school in order to complete his college degree, lead the Trojans to another national championship, and avoid playing for the Houston Texans.

Ouch! And while on the subject of tough football seasons, this Ebay seller's idea -- if successful -- could generate a flood of similar offers from Houston Texan fans. 12/28/05 Update: And here is the rest of the story.

Posted by Tom at 4:59 AM | Comments (1) |

December 16, 2005

Well, "Lonesome Dove" was kind of a love story between two cowboys, too

You've probably heard by now about Brokeback Mountain, the new movie based on the Annie Proulx book about how a secret homosexual relationship between two cowboys plays out over the years. Inasmuch as Larry McMurtry -- author of the incomparable Lonesome Dove novel and later mini-series -- helped write the screenplay for Brokeback, that fact and the generally strong initial reviews are good enough to prompt me to include the film in my holiday movie-going.

But even if Brokeback does not sound like your cup of tea, don't miss this clever review of the film by a gay man trying to reassure heterosexual males about the film's merit, which leads me to believe that this recent overheard conversation is taking place in many other places around the country in addition to New York City.

Posted by Tom at 8:20 AM | Comments (2) |

What Starts Here Changes the World

The University of Texas is on quite a roll these days, and in more ways that simply its national championship-caliber football team.

UT just rolled out its innovative new advertising campaign, a series of nine 30 second commercials with the theme “What Starts Here Changes the World” narrated by former CBS anchoman and UT alum Walter Cronkite. The ads -- which were developed by UT's Office of Public Affairs and the Center for Brand Research in concert with GSD&M Advertising -- emphasize how the UT and Austin communities "together forge a dynamic, creative and diverse community that few American cities can match." UT will use the ads primarily during televised NCAA sporting events, where the networks provide the participating universities some free air time in each such telecast.

My favorite: "Breakfast Tacos."

Posted by Tom at 6:42 AM | Comments (1) |

What does "Franchione" mean?

It's no secret in these parts that Texas A&M head football coach Dennis Franchione had a bad season, not something to take lightly in terms of job security in the football-dominated culture of College Station, Texas. So, after Franchione fired his defensive coordinator at the end of the season, the conventional wisdom was that Franchione would hire a big name coach as the new A&M defensive coordinator, particularly given A&M's willingness to pay top dollar for an assistant coach who would revive the long-dormant Wrecking Crew defense.

Well, suffice it to say that Franchione's hire -- his old friend and oft-fired coach Gary Darnell -- is not exactly what most Aggie fans had in mind as the solution to revive the flagging A&M program. Darnell has been out of football entirely the past year after being fired as head coach at Western Michigan. Moreover, Darnell was previously the source of much angst among Texas Longhorn fans when his unaggressive "read and react" defense that he instituted while serving as Longhorn defensive coordinator from 1994-96 was one of the primary reasons that former Longhorn coach John Mackovic was fired after the 1997 season and remains one of the most unpopular Texas football coaches in history. Darnell's tenure as Texas defensive coordinator included the Horns' defense giving up over 30 points five times in 1994, as well as such embarrassments as the 55-27 pasting that Notre Dame laid on the Horns in 1995 and the lopsided 38-15 Longhorn defeat to Penn State in the Fiesta Bowl after the 1996 season. Just to put the icing on the cake, Darnell was also the college coach of currently underachieving Houston Texans linebacker Jason Babin, on whom the team wasted a first round draft choice.

Thus, with that backdrop, it was not particularly surprising that I received a phone call yesterday from a friend who is an ardent Longhorn fan. While chortling about Franchione's hiring of Darnell, he passed along the following :

Q: "What does 'Franchione' mean in English?"

A: "Mackovic."

Posted by Tom at 5:34 AM | Comments (1) |

Early betting on the ConocoPhillips-Burlington Resources deal

Well, there has been almost a week's worth of bets on the proposed ConocoPhillips - Burlington Resources merger, and those bets have been decidedly against ConocoPhillips.

Since Monday, ConocoPhillips shares have been hammered, closing yesterday at $58.77, which is down almost 7% since the proposed merger was announced. Moreover, Houston-based investment bank Sanders Morris Harris and A. G. Edwards both downgraded ConocoPhillips stock to a "hold" from their pre-merger announcement "buy" recommendation. As noted in this earlier post, the ConocoPhillips play for Burlington runs contrary to traditional big energy company policy toward such mergers during times of high energy prices.

Responding to this market skepticism, ConocoPhillips chairman and CEO James Mulva conceded yesterday in public comments that the company is paying "a full price" for Burlington, but that "access to quality long-term resources has become much more difficult and expensive. We are in an extremely competitive environment and a portfolio of assets of Burlington's quality cannot be replicated." Mr. Mulva also noted that ConocoPhillips is analyzing whether to use hedges to "either lock in prices or mitigate the potential downside of a reduction in gas prices." Finally, Mr. Mulva predicted excess cash flow would allow ConocoPhillips to reduce the relatively high debt-to-capital ratio that it is taking on to make the deal to between 18% to 23% by the end of 2006.

Picking up on this early betting trend, Chronicle business columnist Loren Steffy notes in this column that Mr. Mulva has not been a good horse to bet against over the past several years. As Mr. Steffy notes, Mulva has been an ambitious risk taker who stands out among generally conservative big-oil chief executives. Since becoming chief executive at Phillips in 1999, Mulva has engineered a series of deals of a total value close to $30 billion. Among those deals are the 2001 acquisition of refiner Tosco Corp. for $7.5 billion, the $17 billion merger of Conoco and Phillips in 2002, and the September 2004 purchase of a minority stake in Russian oil giant OAO Lukoil, which gave ConocoPhillips a local partner in the competition to tap Russia's enormous untapped reserves. Although Mulva has financed such acquisitions primarily through debt, that financing technique has turned out to be a good bet as surging profits based on higher energy prices have helped drive ConocoPhillips' debt-to-capitalization ratio down to around 20% while the company's liquidity has increased to a robust $2.8 billion.

So, I share Mr. Steffy's caution about betting against ConocoPhillips in regard to the acquisition of Burlington Resources. Mulva has stood out among the major energy companies in redeploying his company's profits aggressively, and that strategy has transformed ConocoPhillips from a couple of sleepy mid-tier companies into what could be the second largest publicly-owned oil and gas company in the U.S. That track record indicates that he has a good chance of pulling off his biggest bet yet.

Posted by Tom at 4:26 AM | Comments (0) |

December 15, 2005

We're number one!

Unfortunately, I'm not talking about Texas winning the BCS National Football Championship.

Rather, the American Tort Reform Association has named the Texas Rio Grande Valley and Gulf Coast region as the number one "judicial hell-hole" for 2005. The ATRA describes a judicial hell-hole in the following manner:

Judicial Hellholes are places that have a disproportionately harmful impact on civil litigation. Litigation tourists, guided by their personal injury lawyers, seek out these places because they know they will produce a positive outcome - an excessive verdict or settlement, a favorable precedent, or both.

Hat tip to Walter Olson for the link.

Posted by Tom at 8:52 AM | Comments (2) |

We don't really want true health insurance

Clear Thinkers favorite Arnold Kling has been doing extensive research on health care finance issues over the past couple of years and, as noted in this insightful TCS Daily op-ed, he is coming to the conclusion that one of the main problems with the U.S. health care finance system is that most Americans simply do not want to pay for true health insurance:

What we are left with, then, is that people do not want real health insurance. I would gladly take a health insurance policy with a $10,000 deductible per individual, and I suspect that many of my wise, risk-averse TCS readers would, too. But we are in a tiny minority! Most people do not want to be responsible for the first $10,000 in medical expenses, and most people believe that an insurance policy that is expected to pay no claims 95 percent of the time is a bad deal.

I am willing to claim that no insurance market in history ever arose because of spontaneous demand on the part of consumers. Maritime insurance, which was one of the first forms of insurance, was demanded by creditors as a condition for lending money to shippers. Life insurance also initially arose to meet the needs of creditors who were lending money to pensioners. Homeowners' insurance is standard because it protects mortgage lenders. Collision insurance for autos is optional if you own yours free and clear, but not if you still owe money to the finance company. . .

What we call health insurance also arose to meet the needs of creditors. In this case, the creditors were doctors and hospitals, who wanted assurance that they would be paid for service. Comprehensive, first-dollar health coverage, which is not really health insurance, protects suppliers, not consumers.

For the most part, people buy insurance because it is mandated by others. Insurance does not have a large natural market.

Read the entire piece, in which Kling goes on to endorse mandatory catastrophic health insurance, but concedes that most Americans will not embrace such a proposal because they mistakenly continue to believe that employer-based health insurance provides them something for free or at least at far lesser cost than they would pay directly.

Meanwhile, over at the Journal Report, Joseph Antos, who was former assistant director for health and human resources at the Congressional Budget Office, John C. Goodman, founder and president of the National Center for Policy Analysis, and Robert Reischauer, president of the Urban Institute and vice chair of the Medicare Payment Advisory Commission discuss the issue of whether introducing wide-scale consumer choice back into the health care finance industry can have a large beneficial effect on the current inefficiencies in that system. I highly recommend both Kling's piece and the Journal Report for provocative thoughts on the problems confronting America's creaking system of health care finance.

Posted by Tom at 8:01 AM | Comments (4) |

Operation Yao Ming

Marginal Revolution's Tyler Cowen posts on the Brook Larmer's impressive new book on the development of Houston Rockets center Yao Ming, a book that could be nice holiday gift for the basketball fan in your family. Tyler remains skeptical that Yao will ultimately develop into a great NBA player, but my sense is that Tyler's prediction is not supported by the empirical evidence and the special circumstances surrounding Yao's under-development relative to other NBA players.

Yao is only 25 and just beginning his fourth season in the NBA, and he has improved markedly in all facets of the game during each of first three seasons in the league. Until this past off-season, Yao's development had actually been plagued by too much play, as he fulfilled commitments to the Chinese national team that was a condition to their agreement to allow him to play in the NBA. Thus, this past off-season was the first time that Yao had been able to spend most of his time in Houston resting and working on strength and conditioning, and that type of off-season regimen is likely to prompt even greater improvement in Yao's game. Heck, even at this stage of Yao's development, can you name five NBA centers who you would prefer over Yao?

However, all long-time Houstonians know the true secret to Yao fulfilling his potential -- tutoring sessions with former NBA great Moses Malone at legendary Fonde Recreation Center near downtown Houston where Malone schooled a young Nigerian named Hakeem Olujawon during summer pick-up games in the early 1980's. Give Malone a couple of summers with Yao at Fonde and Yao would quickly replace Shaq as the dominant center in the NBA.

Posted by Tom at 7:03 AM | Comments (0) |

The extinction of the one-iron

I've been looking at hybrid golf clubs this holiday season as a possible gift for one of my relatives, so I enjoyed this this Jason Sobol article on the demise of the one-iron, which is one of the most difficult golf clubs to hit well and the reason why the easier-to-hit hybrid clubs are replacing the one-iron in most golfers bags. Sobol notes the late Pulitzer Prize-winning LA Times sportswriter Jim Murray's classic lament about the futility of hitting a one-iron:

"The only time I ever took out a 1-iron was to kill a tarantula, and I took a 7 to do that.''

Posted by Tom at 6:09 AM | Comments (0) |

New study links Alzheimer's to diabetes

A new Brown University Medical School study published in the Journal of Alzheimer's Disease supports a growing body of clinical evidence indicating that Alzheimer's may be a new form of diabetes. The study found that brain levels of insulin and related cellular receptors fall precipitously during the early stages of Alzheimer's and that insulin levels continue to drop progressively as the disease becomes more severe. Previous posts on Alzheimer's-related matters are here.

Posted by Tom at 5:55 AM | Comments (0) |

Spitzer: "But I got him with the strawberries . . ."

Does anyone else get the sense that NY attorney general Eliot Spitzer is becoming Captain Queeg-like in his pursuit of former American International Group CEO, Maurice "Hank" Greenberg?

The latest revelation in the Lord of Regulation's relentless campaign against the former AIG executive Greenberg is the serious charge that Greenberg and other former AIG executives cheated the Greenberg-controlled charitable foundation -- the Starr Foundation -- through "self dealing" in the handling of the estate of AIG founder, Cornelius Vander Starr. Spitzer's report on the matter contends that Greenberg's self-dealing deprived the Starr Foundation of assets that "would now be worth more than $6 billion."

Well now, those are serious charges. But a couple of small details were left out of Spitzer's typically boisterous media release on the charges. First, the Internal Revenue Service, a New York state court and the New York attorney general's office had previously approved the transactions that Spitzer now characterizes as improper "self-dealing." But even more incredibly, Spitzer is complaining of allegedly fraudulent transactions that occurred 35 years ago!

Spitzer's new allegations revolve around three 1970 transactions that followed Mr. Starr's death in December 1968. Each of the transactions was designed to liquidate Mr. Starr's holdings in private AIG-related companies with the proceeds to go to the Starr Foundation. Spitzer contends that Greenberg and the foundation's other executors sold the foundation's interest in two private companies -- American International Underwriters Far East Inc. and C.V. Starr Co., a Bermuda-based insurance broker and underwriter -- for a total of a little more than $2 million in 1970. Spitzer contends that those stakes were worth six times that much at the time.

Similarly, later that same year, Spitzer asserts that Greenberg and the foundation's other executors sold Mr. Starr's 20% stake in Starr International Co. -- the investment vehicle long used to supplement the compensation of AIG executives -- to for $3,000. Inasmuch as AIG had acquired Starr International's assets for $100 million in stock earlier in 1970, Spitzer reasons that Mr. Starr's 20% stake was really worth $20 million, not $3,000. In total, Spitzer contends that if the lost funds had remained invested invested in AIG shares that they would now be worth more than $6 billion, and that Greenberg and the Starr Foundation's other AIG-related directors "had a fundamental conflict of interest because they controlled" the seller, the buyer and the beneficiary in regard to the transactions.

Oh, another little detail that Spitzer failed to mention is that the $6 billion in value to which Spitzer refers is largely attributable to Greenberg's 35 year management of AIG, which Spitzer unceremoniously ended earlier this year.

Unfortunately for Spitzer, by 1979, the Internal Revenue Service, a New York court and the New York attorney general's office all approved the Starr estate's transactions to which Spitzer now complains. Moreover, the Starr Foundation president publicly denied Spitzer's charges and, for their part, Greenberg and the three other living exectors of the Starr estate refuted the allegations and stated "each of us fulfilled our duty to Mr. Starr and the foundation without compensation and in accordance with his wishes and the law." Indeed, Greenberg and the othrer directors point out that Mr. Starr himself set up and approved the transactions before his death, and that the transactions allowed the Starr Foundation to amass assets of more than $3 billion today, not including about $2 billion in donations disbursed over the years.

Never at a loss for a response to such seemingly salient points, Spitzer replied that Greenberg and the other executors at the time made false statements and key omissions upon which the previous IRS, NY AG, and court approvals were based.

So it goes in the wacky world of the Lord of Regulation.

Posted by Tom at 4:27 AM | Comments (4) |

December 14, 2005

Roger Clemens, player agent

That's right. In addition to being one of the best pitchers in Major League Baseball history, Roger Clemens is now carving out a new career as an unusually effective player agent.

How so, you ask? Well, there is simply no explanation possible other than Clemens' negotiating skill for the Stros' decision yesterday to sign the atrocious Brad Ausmus to a two-year, $7.5 million contract. Clemens had previously stated publicly that one of the key factors that he is considering in deciding whether to rejoin the Stros next season is whether the club retains free agent Ausmus, who is Clemens' favorite catcher. Noting that factor, Stros GM Tim Purpura observed upon signing Ausmus to the contract that "he's one of those types of players that you can't really appreciate . . . from the numbers."

Well, Purpura is certainly correct on that score. Despite his ability to block Clemens' split-finger fastball in the dirt, Ausmus is one of the worst of all Major League baseball players over the past five seasons (complete statistics here). During that span, Ausmus has created an astounding 133 fewer runs that an average National League hitter would have produced in the same number of games (runs created against average - RCAA - explained here) and all of his hitting statistics are well below-average for a National League catcher. In fact, retaining Ausmus means that he will soon set the record for the lowest career RCAA in Stros history:

1 Roger Metzger -153
2 Brad Ausmus -152
3 Bob Lillis -109
4 Craig Reynolds -83
5 Tim Bogar -73
6 Luis Pujols -64
7 John Bateman -60
8 Bob Aspromonte -56
9 Rafael Ramirez -55
10 Adam Everett -53

It used to be that the Stros rationalized keeping Ausmus around because of his defensive ability, but the 37 year-old catcher is not even average defensively any longer despite his willingness to sacrifice his body for Clemens' split-finger pitch. Ausmus has been so bad for such a long time that the fact that he "only" cost the Stros 14 fewer runs last season than an average National League hitter would have is curiously viewed as a favorable factor in the decision to retain Ausmus.

So, why are the Stros overpaying a replacement-level player such as Ausmus by at least $2.5 million over each of the next two seasons? The only rational explanation is that Ausmus' contract is part of the inducement for Clemens to return. And if Clemens does return and pitches even half as well as he did over the past two seasons, then the Ausmus contract will be worth it. But paying out that kind of scratch on the hoped-for return of a 43 year-old pitcher who broke down physically at the end of this past season is not doing anything to solve the Stros' hitting woes, which remain unaddressed during this offseason.

Posted by Tom at 5:35 AM | Comments (10) |

Overpaying to save gasoline

The Wall Street Journal's Holman Jenkins' provocative column from a couple of weeks ago on the economics of the Toyota Prius hybrid automobile prompted a considerable amount of criticism from Prius owners, all of whom seem to be quite pleased with their decision to buy the vehicle. In response to that reaction, Mr. Jenkins pens this column ($) in today's WSJ in which he defends his position that it does not make economic sense to overpay to save gasoline, but concedes that there are good reasons to buy a Prius:

Several Prius partisans emailed to say they purchased their cars not to save money but to save the earth, or at least make a statement about doing so. That's a perfectly good reason to buy a car (as is wanting to meet girls). However, we doubt their Hollywood coreligionists would be so keen on solidarity if it meant driving around town in a Ford Fiesta.

Posted by Tom at 4:56 AM | Comments (2) |

Natural gas prices hit another record high

On the heels of this post from last week and ConocoPhillips' big bet on natural gas earlier this week, natural gas futures jumped to another all-time high yesterday for a front-month contract and settled above $15 per million British thermal units for the first time. January futures on the New York Mercantile Exchange rose as high as $15.78 and settled at $15.378 per million British thermal units, which is an increase of about 38 cents from its previous settlement high.

Inasmuch as natural gas production in the Gulf of Mexico has still not recovered fully from the damage caused by multiple hurricanes earlier this year, natural gas supplies remain constricted. As a result, price is volatile on virtually any indication of increased demand, and the recent cold weather in the Upper Midwest and Northeast -- the two main areas of hearing fuel demand -- is seen as the primary cause of the increasing price of natural gas over the past week's trading sessions. Following an unusually warm November in those regions, December has been bitterly cold as weather futures are betting that it will be at least 20% colder than normal in New York City and Chicago through the Christmas holiday.

Just the thought of that type of weather may force me to hit some golf balls at the driving range this afternoon in Houston's beautiful late fall weather. ;^)

Posted by Tom at 4:24 AM | Comments (1) |

Lunch with Ken Lay

Lunch was interesting in Houston yesterday as former Enron CEO and federal criminal defendant Ken Lay was the featured speaker at the Houston Forum's monthly luncheon. An earlier post on the lunch is here and the NY Times article on Mr. Lay's talk is here.

From Mary Flood's article on the talk, it sounds as if Mr. Lay has been reading this blog as he bones up for testifying at trial (which decision to testify, as Ellen Podgor notes, may be premature):

Flanked on the podium by Texas and U.S. flags, and a gold- and red-trimmed Christmas tree, Lay read from a prepared text in which he attacked the Justice Department for prosecuting the accounting firm Arthur Andersen, destroying the company and dropping the case. He said the prosecutors have been trying to criminalize normal business practices.

"If asked, I am certain that the Enron Task Force would say they have taken so much time because the crimes at Enron are so complicated," he said. "However, I would say the Enron Task Force has taken so much time because it is complicated to find crimes where they do not exist."

He said he doubts most of those who pleaded guilty in this case were criminals — rather they were bullied into their pleas by prosecutors. . . .

Prosecutors want to narrow the case, and defendants want more witnesses and experts, Lay said.

"Why do we want the truth in the case, and why does the Enron Task Force want the truth out of the case?" Lay asked.

Frankly, that's a darn good question. Despite that, Chronicle business columnist Loren Steffy is not impressed with Mr. Lay's talk (blog post here).

Mr. Steffy's skeptical reaction to Mr. Lay's proclamation of innocence is quite common, but misses the difference between being held responsible in civil context as opposed to a criminal one. Few people -- probably not even Mr. Lay -- would contend that Mr. Lay should not share at least some responsibilty in a civil lawsuit for Enron's demise. However, absent the state making a clear presentation of an alleged criminal act, the responsibility for Enron's descent into insolvency should be sorted out among all responsible parties in a civil lawsuit, not a criminal case against a few of the more prominent responsible parties. In that regard, the Enron Task Force's indictment (download pdf here) and current statement of its criminal case against Mr. Lay and his co-defendants (download pdf here) reveals that the Task Force's presentation of criminal charges against Mr. Lay is anything but clear. Indeed, a lack of coherence in the presentation of criminal charges against Enron-related defendants has been a recurring problem for the Enron Task Force.

Taking risk is how entreprenuers create jobs for communities and wealth for business owners. Risk takers sometimes make dubious or plain bad decisions, but that's an essential part of the price that we pay to enjoy the jobs and wealth that are derived from a bustling market economy. Criminalizing merely bad business decisions dampens that essential entreprenurial spirit and will ultimately lead to job loss and dimunition of shareholder wealth. That is simply not a coherent use of our criminal justice system.

Posted by Tom at 3:50 AM | Comments (3) |

December 13, 2005

Ruling against the Enron retention bonuses

Among the more interesting civil cases that arose out of the Enron Corp. bankruptcy case are the various lawsuits that were filed to recover retention bonuses paid to former key Enron executives.

Retention bonuses are payments made to a company's key executives immediately before the filing of the company's bankruptcy for the purpose of retaining those key executives during the company's bankruptcy case, particularly during the early stages of the case when risk of liquidation is high. The theory behind retention bonuses is that ensuring that key executives continue to work for a debtor-company is a reasonable hedge against the risk of liquidation, which generally results in greater loss of jobs and lesser dividends on creditors' claims than if the debtor-company is reorganized.

Retention bonuses have always been controversial, primarily because they are made immediately prior to the company going into bankruptcy and, thus, are not subject to Bankruptcy Court approval as they would be if proposed after the company enters bankruptcy. Nevertheless, creditors have traditionally used the avoidance powers in bankruptcy cases -- i.e., the power of the Bankruptcy Court to order the return to the debtor's bankruptcy estate of certain pre-petition payments that prefer certain creditors over others or that constitute fraudulent transfers to third parties -- to go after retention bonuses paid to a debtor-company's former executives. In most cases, the core issue in such lawsuits is whether the debtor-company's payment to the key executive was a reasonable price to pay for the executive's services in helping the debtor-company reorganize.

Enron's bankruptcy involved a particularly interesting case in regard to retention bonuses. Once one of the most valuable public companies in the U.S., Enron went through a dizzing spiral downward during the last several months of 2001 amid revelations of an accounting scandal and CFO Andrew Fastow's use of special purpose entities to enrich himself and several of his close associates. Inasmuch as Enron was the market maker in its online trading business, that business (called "Enron Online") was hugely profitable and potentially one of Enron's most valuable assets as it entered bankruptcy. However, due to competitive pressures, Enron Online was losing its key traders during Enron's descent into bankruptcy, particularly after it became clear that the company's trading desk was going to have to go dark for a time after bankruptcy while Enron attempted to find a buyer for trading operation.

Consequently, during the company's chaotic days leading up to bankruptcy, Enron's management and board of directors approved the payment of retention bonuses in the total amount of over $100 million to approximately 300 key traders and executives in an effort to retain that personnel during the early stages of Enron's bankruptcy case. The number and amount of those payments (one payment to a particularly successful trader was over $8 million) infuriated Enron's creditors and former employees who lost their jobs as a result of bankruptcy, so a former employee's committee was formed in Enron's chapter 11 case and that committee pursued the lawsuits on behalf of Enron's estate to recover the retention bonuses. Most of the cases settled, but approximately 40 former Enron key employees declined to settle and decided to defend their bonuses at trial, which took place earlier this fall.

In this 102 page decision (pdf), Bankruptcy Judge Robert McGuire of Dallas (sitting by designation in Houston's bankruptcy court) concluded that the retention bonuses were either voidable preferences or constructive fraudulent transfers (i.e., payments made for inadequate consideration in return) and ordered that the former Enron executives pay damages to the Enron estate equal to the amount of their retention bonuses. Here is the Mary Flood/Chronicle article on Judge McGuire's decision.

The decision makes for interesting reading in an area of the law that does not have much precedent, but the recent amendments to the Bankruptcy Code limit the precedential value of the decision. Under those amendments, pre-petition retention bonuses to key employees are now presumed to be voidable transfers and are expressly subject to Bankruptcy Court approval even if made prior to the commencement of a bankruptcy case. Thus, the new Bankruptcy Code amendments make it more difficult for troubled companies to retain their key employees as they tumble toward reorganization in bankruptcy, which -- at least on the margin -- increases the risk that those companies will liquidate rather than reorganize in bankruptcy. Increased liquidations generally result in greater job loss for communities and smaller dividends (if any) on creditors' claims, which are two consequences that I don't think Congress had in mind when it passed this particular amendment.

Posted by Tom at 6:26 AM | Comments (0) |

SCOTUS agrees to consider Texas redistricting cases

The Supreme Court on Monday agreed to review the controversial 2003 redrawing of Texas congressional districts that Democratic Party officials claim was unconstitutional because it disenfranchised Democratic voters and was improperly designed primarily to ensure the Republican Party's control of Congress. In so doing, the high court took on four cases that could have considerable impact on the next year's House and Senate elections.

The Texas districts were redrawn in 2003 under the direction of former House Majority Leader Tom DeLay, who is currently fighting state criminal charges that were the result largely from the Republicans' financing of the redistricting initiative. The Texas redistricting that was in effect during 2004 election had a considerable impact, as four incumbent Democratic members of the Texas congressional delegation lost re-election, one switched parties, and one open Democratic seat went Republican. The Texas net gain of six seats was enough to offset other Republican congressional losses, and prevented the Democratic Party from strengthening its minority by three seats. If the Supreme Court strikes down the Texas redistricting plan, then the decision could give the Democrat Party a considerable boost during next year's elections by giving Democratic candidates a Supreme Court decision on which to base charges of cronyism and abuse of power against the GOP.

The cases revolve around the requirement that all states each decade must use revised census data to redraw congressional districts to adjust for population shifts. In order to fulfill the "one person, one vote" doctrine, each district should include about 600,000 individuals, but whatever party that controls Congress at a particular time has traditionally gerrymandered districts to facilitate the party's chances of retaining seats (and thus, power) in Congress. The Supreme Court will consider a number of issues in the four cases, including whether Texas violated the one person, one vote doctrine by using outdated census data in drawing the new districts, whether the plan constituted "partisan gerrymandering," and whether the redistricting map is constitutional under the Voting Rights Act. The Justice Department's Civil Rights Division recommended against approval of the 2003 Texas redistricting plan under the Voting Rights Act, but the Department and approved it, anyway.

Lyle Denniston over at the Scotus Blog provides the following analysis in his post the Supreme Court's decision to hear the cases:

When the new cases are heard, the focus will be on Justice Anthony M. Kennedy, who provided the decisive fifth vote on April 28, 2004, to keep alive the possibility that a judicial standard could be developed to judge political gerrymanders' constitutionality. He did so in the case of Vieth v. Jubelirer, a Pennsylvania congressional redistricting case. After that, in October 2004, the Court sent the Texas redistricting challenges back to the U.S. District Court that had rejected those claims, with instructions to reconsider the plan in the light of the Vieth decision. The three-judge District Court on June 9 of this year again rejected the challenges, putting new emphasis this time on the claim of a one-person, one-vote violation in the partisan gerrymandering.

By the time the new cases come up for argument, there may be two new Justices joining in the review -- Chief Justice John G. Roberts, Jr., of course, but also Justice-nominee Samuel Alito, Jr., if the Senate has confirmed him by then. Roberts replaces the late Chief Justice William H. Rehnquist and Alito would replace Justice Sandra Day O'Connor. Both of those had voted in Vieth to deny judicial review of partisan gerrymander challenges, but that view did not prevail then.

The preliminary indication from the the Supreme Court is that oral argument in the cases will take place in the afternoon session on March 1, 2006.

Posted by Tom at 4:58 AM | Comments (0) |

ConocoPhillips seals the deal

After word leaked out over the past weekend that ConocoPhillips was in serious discussions to buy the fellow Houston-based Burlington Resources, the companies finalized on Monday an even richer deal than was initially reported.

ConocoPhillips ended up agreeing to increase the purchase price for Burlington from $30 billion to $35.6 billion, which computes to $90.69 per share of Burlington stock. That price is about a 10% premium on the $82.50 price for Burlington stock at the close of the market on Monday and an almost 20% premium on the price of Burlington stock from just this past Friday. ConocoPhillips will pay that amount in cash and stock, giving Burlington shareholders $46.50 in cash and .7214 share of ConocoPhillips common stock, which was equal to $44.19 of ConocoPhillips stock as of Monday's market close. Current ConocoPhillips shareholders will own 83% of the company upon completion of the merger, which the companies expect to close during the first half of 2006.

ConocoPhillips will finance the acquisition mostly through debt, which has been its modus operandi during an acquistion spree under CEO James Mulva over the past several years. ConocoPhillips's net debt will increase by about $18 billion to fund the acquisition, although Mr. Mulva noted yesterday that the company projects that net cash flow should retire 50% of that debt over the next three years.

As the market reverberates from the size of ConocoPhillips' bet on the increasing value of Burlington's unconventional natural gas assets, the logical question is "who's next?" Burlington is one of several mid-tier exploration and production companies that have substantial North American gas assets and thus, those other companies could also be potential targets of bigger companies that elect to match ConocoPhillips' bet of continued high natural gas prices. Among these other companies are EOG Resources Inc., XTO Energy Inc., Southwestern Energy Co., and Ultra Petroleum Corp., and even larger independents such as EnCana Corp., Devon Energy Corp., Pioneer Natural Resources, and The Woodlands-based Anadarko Petroleum Corp. could end up being targets of major E&P companies trying to lock up natural gas assets in a rising market.

Posted by Tom at 4:06 AM | Comments (0) |

December 12, 2005

Kinky Friedman interview

Michael Schaub posts this interesting interview with Texas author, songwriter (The Ballad of Charles Whitman, They Ain’t Makin’ Jews Like Jesus Anymore and Get Your Biscuits in the Oven and Your Buns in the Bed), musician and independent gubernatorial candidate Kinky Friedman, which includes the following pearls of wisdom from the self-styled original Texas Jewboy:

Q: Do you think you’d be able to work with the Democrats and the Republicans in the state legislature?

Absolutely. I will charm their pants off. Invite ‘em over, we’ll have some barbecue, smoke some cigars together, and we’ll get this thing rolling. And a lot of things can be done without the legislature, . . . I’d like to rename four state highways after Waylon Jennings, Willie Nelson, Bob Wills, and Buddy Holly. Not toll roads, by the way.

Q: (State) Senator Jeff Wentworth objected to naming a road after Willie Nelson this year.

That’s right! (Laughs.) But it was a toll road! Willie said he’s worked hard his whole life, and doesn’t want a toll road named after him, and that maybe the electric chair would be good.

Q: Who do you think was the last great governor that Texas had?

Great? Probably Sam Houston. It’s been downhill from there. I always like to quote Henry Kissinger, who said that 90 percent of politicians give the other 10 percent a bad name.

Q: You’ve talked about your “anti-wussification” campaign for Texas. What does that involve?

Making it okay to say “Merry Christmas.” Making it okay to smoke where you want to. Bringing back the Ten Commandments. I may have to change their name to the Ten Suggestions. I want to bring them back to the public schools. They were taken out not because of church and state, but because of political correctness. Some atheist came up and said he didn’t like the Ten Commandments. We all know what happens when an atheist dies. His tombstone reads “All dressed up and no place to go.” By the way, I’ve written my own epitaph, Mike, which is: “If you can read this, you’re standing on my head.” It’s a good one, ain’t it?

Read the entire interview. If Friedman stays in the race, then the television ratings for the upcoming Texas gubernatorial debates in 2006 may set records. ;^)

Posted by Tom at 6:40 AM | Comments (2) |

ConocoPhillips makes big play for Burlington Resources

ConocoPhillips is negotiating to purchase Burlington Resources Inc. in a huge $30 billion deal in a big bet that natural gas supplies will remain tight and higher prices the norm for the forseeable future. Burlington stock has been a hot item this year, trading at $40.40 a share in January and closing this past Friday at $76.09. ConocoPhillips shares closed Friday at $63.07 a share, giving it a hefty market cap of $87.5 billion. Although negotiations are still ongoing, a deal could be announced by the two Houston-based companies later this week.

Burlington Resources is one of the most successful companies developing natural-gas production from unconventional fields where the gas is embedded in rocky formations that make drilling difficult, expensive and dangerous. Inasmuch as natural gas is a relatively clean-burning fuel that heats a majority of U.S. homes and is widely used in industry, rising prices and improved technology are making unconventional natural gas fields much more attractive to energy companies that are increasingly desperate to increase reserves. About 80% of Burlington's assets are related to North American natural gas fields.

The impending deal highlights conflicting views in the oil and gas industry as to whether such deals are good buys. On one hand, some traditional voices such as outgoing Exxon Mobil Corp. CEO Lee Raymond take the position that current high energy prices reflect a business cycle and that, as a result, producing and reserve assets are over-priced during such cycles. On the other hand, there is a growing faction in the oil and gas industry that views rising commodity prices as a fundamental shift in the market resulting from growing world-wide demand and slowing growth in supplies. Thus, that view contends that even expensive deals for companies with solid asset portfolios are a good bet, which was the rationale for Chevron Corp.'s $18 billion acquisition of Unocal Corp. earlier this year.

Posted by Tom at 4:25 AM | Comments (0) |

2005 Weekly local football review

Titans 13 Texans 10

Texans kicker Kris Brown made his contribution to the Reggie Bush sweepstakes today as he missed not one, but two, field goals in the closing minutes to ensure that the Texans (1-12) remain in position to have the worst record in the NFL this season and have the first draft choice in the 2006 NFL Draft. This was another particularly ugly game that pitted two bad teams playing in front of a half-filled stadium in Nashville on a cold, gray day. The Texans' offense amassed a paltry 234 yards, including 82 through the air as Texans QB David Carr was sacked six times and hit or hurried countless other times -- the Texans' pass offense is the worst in the NFL this season and one of the worst in the NFL over the past several seasons. The Texans play Arizona and Jacksonville over the next two weeks at Reliant Stadium before mercifully finishing their abysmal season in San Francisco on New Year's Day.

Cowboys 31 Kansas City 28

In the type of hugely entertaining game that Texans fans thought they were going to be seeing this season, the Cowboys (8-5) survived a wild last 22 seconds in this one to remain a game back of the Giants in the NFC East. After offensive line problems had constricted the Pokes' offense over the past several games, the Cowboys burst out for 445 yards of total offense as QB Drew Bledsoe threw for three TD's, including the game winner. Given the Cowboys remaining schedule (at Washington, at Carolina, and St. Louis at home), I've got my doubts that they can win all three, but this team is feisty and has played every game close this season. If the Pokes make the playoffs, no team is going to want to play them.

In other local football-related news, Texas Longhorn QB Vince Young, who hails from Houston Madison High School, came in second to Bush in the balloting for the Heisman Trophy. In most years, Young would have been a run-away winner of the award, which is college football's most prestigious. However, Bush is a once-in-a-decade type of player and his exploits late in season for USC sealed the award for him.

Posted by Tom at 4:23 AM | Comments (1) |

December 11, 2005

The Chron continues to ignore the real UH story

The Houston Chronicle's latest story about the University of Houston prompts me to wonder when the local newspaper is ever going to sit up and take notice of the far more important story that impacts Houston's primary public university in particular and financing of Texas' public universities in general.

The latest Chronicle story is a slapdash effort that discusses a UH initiative to increase its entry requirements told through the prism of a suburban student's visit to the UH campus. As is typical of most Houston suburban high school students, UH is a third choice behind the University of Texas and Texas A&M University, and nothing in the visit to the UH campus related in the Chronicle article changed the student's mind.

However, the Chronicle inexplicably continues to ignore the far more imporant story. Given the relative contributions of UT, A&M and UH to the welfare and economy of the State of Texas, does it really make sense for the University of Houston to have an endowment that is only 4% the size of the University of Texas endowment and only 10% the size of Texas A&M's? As discussed in this prior post, that is one of the absurd legacies of the obsolescent Permanent University Fund on higher education in Texas, and it is not even mentioned in the Chronicle's story on UH.

Frankly, rather than dismissing UH as an unattractive choice compared to UT and A&M, a more accurate analysis is that UH is providing far more "bang for the buck" in furnishing a quality educational resource for Houston and Texas at a fraction of the endowed capital of UT and A&M. That the system of funding Texas public universities unfairly deprives UH of the capital that would facilitate a jump to Tier I status is the real story that the Chronicle should be pursuing.

Posted by Tom at 7:27 AM | Comments (2) |

The UT brand

Inasmuch as big-time college football is to the National Football League as triple A minor league baseball is to Major League Baseball, a team's branding rights can become an important asset. Along those lines, this interesting Austin American-Statesman article reports on the surge in royalty income that the University of Texas is enjoying from its athletic teams' recent successes:

The Longhorns' Rose Bowl victory over Michigan in January and the baseball team's national title in June helped boost University of Texas merchandise royalties 29 percent to $4 million in the last fiscal year, . . . So far this year, [UT] has collected more royalties than any of the 200-plus schools affiliated with the Collegiate Licensing Co., which coordinates licensing for most major universities.

To license its trademarked logos, UT charges 8 percent of a product's wholesale price. If a $20 Longhorns T-shirt has a wholesale price of $10, UT would get receive 80 cents. It might not sound like much, but consider that retail sales of collegiate merchandise topped $3 billion last year, according to Collegiate Licensing.

Add a football championship to that, and last year's $4 million could end up looking like a paltry sum.

The article goes on to note that UT's annual royalties from merchandise sales had fallen to a mere $600,000 as of the end of the John Mackovic era, which suggests that UT's considerable investment in Mack Brown has been pretty darn savvy, after all.

Posted by Tom at 6:53 AM | Comments (2) |

Eugene McCarthy and Richard Pryor, R.I.P.

Former senator and Presidential candidate Eugene McCarthy and comedian Richard Pryor died yesterday. Here are McCarthy's NY Times and WaPo obituaries, and here are Pryor's NY Times and LA Times obituaries, along with this rather touching and sad post by Roger Simon. Moreover, Riehl World has this compilation of links to some very funny Pryor stand-up routines.

McCarthy's first and only serious Presidential campaign came during the tumultuous year of 1968. McCarthy's campaign was based primarily on opposition to the Vietnam War and it effectively ended the Presidency of Lyndon Johnson, who elected not to run for the Democratic Party nomination after McCarthy's anti-war campaign showed unexpected strength early in the campaign. After fellow Democratic Party candidate Robert F. Kennedy was assassinated in June (which occurred just two months after the assassination of Martin Luther King), the Democratic Party convention that year took place in Chicago amid riots and civil strife, and ended up nominating Senator Hubert Humphrey, who lost a close election to Richard Nixon. Although McCarthy went on to become somewhat of a Democratic Party gadfly over the ensuing decades, there is no question that his 1968 Presidential campaign sparked societal forces that changed the American political landscape dramatically -- the Democratic Party held the White House for 36 of the first 68 years of the 20th century, but has held it for only 12 of the past 37. McCarthy was 89 at the time of his death.

Pryor was a talented stand-up comedian and comedic actor whose career was cut short by self-destructive behavior. He almost died in 1980 after he set himself on fire while free-basing cocaine, but he ended up using the incident as a joke in his routine -- "You know something I noticed? When you run down the street on fire, people will move out of your way." Pryor was 65 at the time of death and had been suffering from the effects of multiple sclerosis for many years.

Posted by Tom at 5:26 AM | Comments (1) |

December 10, 2005

Oops!

You know it's been a bad day at the office when a typo costs your company over 27 billion yen, which equates to a cool $225 million.

Here's what happened. A Mizuho Securities trader (ex-trader?) wanted to sell one (1) share of J-Com Co. on Thursday morning at 610,000 yen. However, the trader typed the trade in to sell 610,000 shares at 1 yen. Although J-Com was debuting on the Tokyo Exchange with approximately 15,000 shares being offered, the Tokyo Exchange went ahead and processed the sale of J-Com, even though the sale was approximately 41 times the number of outstanding shares. The parent company of Mizuho Securities (Japan's second largest bank) publicly stated that it would fully back the losses from the erroneous trade (how's that for a cost of doing business?), which could wipe out Mizuho Securities' first quarter profit of 28 billion yen (or $233 million). The Times Online article on the trade is here.

And lest we think that only anonymous traders make mistakes, this Andy Kessler/Wall Street Journal ($) piece reminds us that even the Oracle of Omaha is not infallible:

Shrines to Warren Buffett now outnumber Elvis altars. Which makes the Oracle of Omaha's very public bet against the dollar going into this year even more painful for his copycats. Berkshire put on $21 billion in contracts with a value of $1.8 billion and cited "deep-rooted structural problems" and the need for changes in trade policy and dollar declines. With the dollar up 16% against the euro and yen, the investment was down $897 million as of October. So was his stock, until he was bailed out by three gals, Katrina, Rita and Wilma, who popped insurance rates. Can he repeat that little trick next year?

Posted by Tom at 7:44 AM | Comments (2) |

December 9, 2005

What's the big deal with the Lord of Regulation?

Matthew T. Bodie is a Hofstra law professor who is guest blogging over at the Conglomerate blog and, in this post, wonders why fellow law professors such as Stephen Bainbridge and Larry Ribstein are critical of New York attorney general Eliot Spitzer. After extolling the merits of the Lord of Regulation's crackdown on the mutual fund and investment banking industries, Mr. Bodie then observes:

All of these accomplishments took creative application of the laws, as well as the settlement process, to bring systemic changes to entire industries. . . Now, apparently it makes one a naif to believe that Spitzer has improved things. But really, what is so controversial about what he has done? Who was in favor of the gross conflicts of interests at play in analysts' recommendations, so luridly displayed in emails? Who thought the rigged bidding in the mutual fund industry was a practice to be encouraged? Really, where's the problem?

Mr. Bodie's question is commonly asked regarding the use of the state power to prosecute or regulate through civil litigation the unpopular and greedy businessperson of the moment. "Why shouldn't (insert the name of any Enron defendant, Arthur Andersen, Martha Stewart, Frank Quattrone, Hank Greenberg, etc) be prosecuted or sued," the argument goes. "They probably did something illegal. So what if the state has to cut some corners in pursuing them. That's a small price to pay for protecting us from these evil people, isn't it?"

Well, the problem is that sacrificing the rule of law is never a small price to pay, and sacrifice the rule of law is precisely what Spitzer has done in his quest to become the Lord of Business Regulation and the next Governor of New York. Just a quick overview of Spitzer's tactics over the past couple of years exposes the widespread abuse of authority and the rule of law in pursuing his popular agenda:

Publicly playing to public envy and resentment of wealthy businesspeople by defaming Maurice "Hank" Greenberg (here and here) as well as Richard Grasso and Kenneth Langone;

Criminalizing those who would take the risk of creating a market for home ownership for those who most need it;

Creating employment opportunities for his chums (noted by Mr. Bodie);

Failing to coordinate investigations with other governmental agencies;

Interference with the regulatory role of other governmental agencies (here and here and here);

His prominent involvement in the drive of U.S. governmental officials to criminalize business generally;

Transparently assisting favored corporate suitors in the acquisition of target companies;

His involvement in eviscerating the corporate attorney-client privilege and in bludgeoning dubious plea bargains and settlements from business executives; and

The destruction of professional careers and personal lives left in the wake of his abuses.

In short, the problem with Spitzer is that his campaign to regulate corporate agency costs is, as Larry Ribstein has coined it, a lottery. If the prosecution pursues a bit player such as William Fuhs or Daniel Bayly in the Enron-related Nigerian Barge case and can come up with something particularly distasteful to the jury -- such as Merrill Lynch's involvement with the corporate pariah Enron -- then it wins. On the other hand, if Spitzer slams a little guy such as William Sihpol while failing to pursue his dastardly superiors, then the government loses. This is a radical abuse of our justice system, and the carnage to the families of Mr. Sihpol, Martha Stewart, Mr. Bayly, Mr. Fuhs, Jamie Olis and others who are caught in this troubling spiral that Spitzer promotes simply cannot be responsibly dismissed as a "trade-off" of an imperfect system.

However, as great as my compassion is for members of those families, my even greater concern is for the principles of justice and respect for the rule of law upon which the success of our society is largely based. For if we lose those, then -- as Sir Thomas More reminded Will Roper in A Man for All Seasons -- "do you really think you could stand upright in the winds [of abusive state power] that would blow then?" Even wealthy business executives are entitled to justice and the protection of the rule of law in the face of the overwhelming power of the state. Not only for their protection, but for ours.

Posted by Tom at 6:38 AM | Comments (10) |

Natural gas prices spike to new record

It was the coldest day of this winter season in Houston and much of rest of the U.S. yesterday, and the cold blast was met with a new record price for natural gas -- January natural-gas futures hit an all-time high of $15.10 a million British thermal units on the New York Mercantile Exchange and then settled at a record high of $14.994 a million British thermal units.

Although damage to production facilities from the hurricanes earlier this year reduced available supplies of natural gas, the impetus for the current spike is cold weather. Although November was a relatively warm month, December is shaping up to be bitterly cold as weather futures on the Chicago Mercantile Exchange predict that December will be almost 25% colder than normal in Chicago and New York. What is even more remarkable is that the spike in natural gas prices isn't bigger news than it is. Until the prior spike hike after hurricanes earlier this year, gas futures had rarely risen above the $10 a million BTU level and industry players thought a price of $15 was analogous to $100-a-barrel oil prices. Interesting how perceptions quickly change as people adjust to changing market conditions.

Posted by Tom at 4:46 AM | Comments (1) |

Mistrial declared on remaining counts in Duke Energy trading case

As anticipated by this earlier post, U.S. District Judge Nancy Atlas declared a mistrial earlier today on the remaining 12 criminal counts against former Duke Energy trader, Timothy Kramer. Two days ago, the jury acquitted Kramer on seven counts and his co-defendant, former Duke Energy trader Todd Reid, on all counts. Earlier posts on the case are here.

This case establishes once again that it's far easier in most white collar criminal cases involving the prosecution of agency costs to bludgeon a plea bargain out of the defendants than to obtain a conviction through a fair trial.

Posted by Tom at 4:17 AM | Comments (0) |

December 8, 2005

Bainbridge disassembles Nocera on SOX

The New York Times' Joseph Nocera has written a couple of real doozy op-eds recently, one extolling the "lofty standards" of New York AG Eliot Spitzer and another one defending the virtues of the Sarbanes-Oxley Act, the latter of which contained a quote or two from UCLA law professor and well-known corporate law blogger, Stephen Bainbridge.

In this Tech Central Station op-ed, Professor Bainbridge dissects Nocera's argument in favor of SOX and exposes the legislation for what it is -- a knee-jerk legislative reaction to a brief spike in corporate accounting scandals that arose after the bursting of the late 1990's stock market bubble. As Bainbridge lucidly points out, SOX neither makes such scandals less likely to occur nor improves the functioning of public-equity financing markets.

Advantage Bainbridge.

Posted by Tom at 7:15 AM | Comments (0) |

Stros pass on offering Clemens arbitration

The Stros continue to make some good personnel moves and some dubious ones during the always entertaining Major League Baseball off-season.

First, the good ones. The Stros passed on offering free agent pitcher Roger Clemens salary arbitration, which means that Clemens is free to negotiate a deal with any other Major League club and the Stros cannot strike a deal with him until after May 1, 2006, a month after the beginning of the 2006 season. I don't expect Clemens to sign with another club because I doubt that he could arrange a deal as sweet as the one he had with the Stros (big money, only required to show up when he pitches, pitch close to home, etc.), but even if he does, the Stros decision not to offer him arbitration was the right one. It simply does not make much economic sense to risk locking up $20 million on a 43 year old pitcher -- even one of the all-time best -- when the club's strength is in its young pitching prospects.

In another good move, the Stros elected not to offer salary arbitration to utility infielder Jose Vizcaino, who is so unproductive at this stage of his career that I am hoping that he retires and moves into the Stros' player development department working with minor leaguers. Well, on second thought, maybe working with minor leaguers on everything other than hitting -- Vizcaino's career hitting stats are the following: -200 RCAA; .318 OBA; .346 SLG; .664 OPS. All of those are far below those of an average National League player.

But the Stros cannot seem to make good moves without making at least one bad one. They did so yesterday by offering salary arbitration to catcher Brad Ausmus, who has been among the five worst hitters in the National League over the past five seasons. The justification for signing Ausmus used to be that his defensive capabilities at catcher were so good that a club could overlook his abysmal hitting, but even that argument doesn't work anymore -- Ausmus isn't even a good defensive catcher at this stage of his career. Although Ausmus did have one very magic moment last season, it's a mistake to hold on to far below-average players at inflated prices.

Finally, in another interesting development, the Stros are quietly offering closer Brad Lidge in trade negotiations with other teams during the MLB Winter Meetings this week in Dallas. Although is always a bit disconcerting taking the risk of trading a talent in his prime such as Lidge, it's really a good idea for the Stros go be exploring such options. The club's strength is in pitching and Lidge has just become arbitration eligible and is due for a big salary jump -- teams have been overpaying for closers on the free agent market this off-season. Thus, so long as the Stros could get an above-average corner outfielder in a trade for Lidge, that deal probably makes sense for the Stros.

Posted by Tom at 5:31 AM | Comments (5) |

Fastow: "What do you mean 'tax fraud?'"

This earlier post noted that Lea Fastow -- a former mid-level Enron executive and wife of demonized former Enron CFO Andrew Fastow -- was prosecuted more harshly than normal for tax fraud because of her relationship to Fastow and endured longer and harsher punishment because of it. Earlier posts on the Lea Fastow case are here.

The Chronicle's Mary Flood reports here that Mr. Fastow apparently agrees with me. He has sworn that neither Mrs. Fastow nor he were involved in tax fraud at all. Of course, as Peter Henning points out, Mr. Fastow's sworn statements raise all sorts of interesting questions.

One of the most interesting questions is for the Enron Task Force -- despite his guilty plea to various crimes under a plea bargain, does Mr. Fastow truly believe that he committed crimes at Enron? It would be a good idea for the Task Force prosecutors to pin Fastow down on that little detail before he takes the stand in the upcoming trial of former key Enron executives Ken Lay, Jeff Skilling and Richard Causey.

Posted by Tom at 4:52 AM | Comments (0) |

December 7, 2005

The hope of the Texans?

How exactly does a human body make the kind of cut that USC running back Reggie Bush is making in the picture on the left?

Although the Texas Longhorns must find a way to stop Bush in the Rose Bowl, the Houston Texans and their supporters are just hoping that Bush comes out of the game in one piece so that he will be available for the Texans to select with their first round draft choice in the 2006 NFL Draft (at least Texans GM Charlie Casserly didn't give that draft choice up in the Philip Buchanon deal). Inasmuch as the current Texans team is nearly unwatchable, take a moment to review this slick USC promotional video for Bush's Heisman Trophy candidacy and the video that is included with this New York Times article of Bush's exploits while playing high school ball in San Diego. This young man is really something special.

Posted by Tom at 10:22 AM | Comments (11) |

Got your Rose Bowl tickets yet?

This US Today article reports on the ticket market for this season's Rose Bowl game between USC and Texas for the BCS National Championship:

[T]ickets in the Texas end zone were selling for $1,050 apiece. Tickets near the 40-yard line were priced at $4,458.

H'mm. Watching the game on HDTV is sounding pretty good, eh?

Speaking of Rose Bowl tickets, you can always count on Craigslist to generate creative new ways to facilitate the exchange of such hot items with, might we say, more traditional services.

Posted by Tom at 8:47 AM | Comments (0) |

The San Antonio Marlins?

The Florida Marlins Baseball Club is making the rounds of potential relocation sites, and the first stop was in San Antonio. Other contenders for the club are Las Vegas, Portland, Oregon, and Charlotte, North Carolina. A move could come as soon as the 2008 baseball season, and such a move could also be impacted by the fact that the current MLB Labor Agreement allows the MLB owners to delete up to two clubs after the 2006 season, so stay tuned.

Interestingly, the potential move of the two-time World Series champion Marlins from Miami is being met with a collective yawn by South Floridians. Craig Depken explains why:

In the end, Miami-Dade County residents will survive just fine without baseball. Although their team won two World Series in their first ten years of existence, in comparison to the sights and sounds of Miami, WS rings are a yawner. In this sense, if the good folks of Miami don't care one way or the other if the Marlins are in town, why should the rest of us?

Posted by Tom at 8:24 AM | Comments (6) |

O'Reilly's appalling ignorance of markets

Bill O'Reilly is a popular Fox News show host and author, but he is really nothing more than a fleetingly entertaining demagogue. Case in point is the following exchange between O'Reilly and Neil Cavuto, another Fox News host:

CAVUTO: Okay. Gas prices are down a lot. Why do you think that is?

O’REILLY: Because they’re afraid they’ll go to jail. And those C.E.O.s who manipulated them–

CAVUTO: Why are you sure that they manipulated them?

O’REILLY: I have guys that are inside the five major oil companies - my father used to work for one of those oil companies, by the way - who have told me that in those meetings they look for every way to jack up oil prices after Katrina, every way. When they didn’t have to. And they got scared because in my reporting and some other reporting, they said –

CAVUTO: Wait, you’re taking credit for gas prices being down?

O’REILLY: My reporting and reporting of others.

CAVUTO: Has nothing to do with refineries that came back online or the crisis calmed after the hurricanes?

O’REILLY: The demand for oil in this country is the same now as it was one day after Hurricane Katrina. It’s the same. Selling the same amount of gas and oil.

CAVUTO: But the supply has increased, right?

O’REILLY: The supply has increased? Who knows.

CAVUTO: And it’s traded like a stock, correct?

O’REILLY: It’s traded by speculation, and the bottom line is they were afraid of a federal investigation and they said–

CAVUTO: I think you’re crazy, but you're right on the Christmas, but wrong on this.

In this post, Don Boudreaux of Cafe Hayek -- in a refreshingly non-derisive manner -- explains cogently why O'Reilly's position is demagogic nonsense.

Posted by Tom at 7:18 AM | Comments (3) |

The legal research racket

In this interesting post, the Wired GC discusses the potential negative impact of Web 2.0 on high-cost legal research services such as Westlaw and Lexis/Nexis, and then passes along this anecdote that should give pause to the legal research vendors:

Then as I am about to leave my office last night and head home to complete this post, I opened a November 30, 2005 letter from an SVP of West. It was one of those customer-friendly letters you get these days. You know, the sort that starts out “Dear Westlaw Subscriber” and goes on to state:

“To help us continue upgrading the Westlaw content and functionality that helps you carry out top-quality research, we will be increasing rates for Westlaw usage by an average of six percent (6%) as of January 1, 2006.”

The price increase helps me? I set my 2006 budget months ago. For most technology-driven companies, upgrades typically lower costs for customers. No mention of any enhancements, either.

Memo to West: a form letter that slaps a long-term customer with a 30 day notice of a unilateral price increase is very much Law 1.0. Risking driving a customer away is rather ignoring Law 2.0.

Read the whole post.

Posted by Tom at 6:20 AM | Comments (0) |

Duke traders acquitted on most counts

In another stunning loss for federal prosecutors in the post-Enron prosecutions of persons involved in the energy trading industry, a federal jury in Houston federal court yesterday acquitted former Duke Energy trader Todd Reid on all counts of conspiracy, fraud and falsifying books, and acquitted co-defendant Timothy Kramer on seven counts of wire fraud, mail fraud, and circumventing Duke Energy internal controls in connection with the award of $9 million in trader bonuses during 2001. Earlier posts on the case are here, here and here.

As of mid-afternoon yesterday, the jury reported to U.S. District Judge Nancy Atlas that they were deadlocked on 15 remaining counts against Kramer. Judge Atlas instructed the jury to continue deliberating and then informed the attorneys involved in the case that she would declare a mistrial if the jury could not agree on a verdict on the remaining counts against Kramer by the end of the day. Later that afternoon, the jurors sent the Judge a note informing her that they had acquitted Kramer on three more counts and that they wanted to return tomorrow to attempt to resolve the remaining 12 counts (a personal matter of one juror prevents the jury from deliberating today). Judge Atlas agreed to allow the jury to do so.

As noted in the previous posts on this case, this was one of the first criminal trials in which executives have been accused of devising schemes to generate profits in a trading book by using "mark-to-market" accounting in calculating bonuses, on one hand, and entering losses in an "accrual book" that had no bearing on bonuses, on the other. Duke Energy, Enron Corp. and many other energy traders previously used mark-to-market accounting to record profit and loss for energy contracts that might not settle for years into the future. However, the mark-to-market accounting method has come under intense scrutiny since the demise of Enron in late 2001 because of the wide latitude that the method allows in recording profitable results in trading operations.

The government essentially accused Kramer and Reid of cheating their employer, which was a subsidiary of Duke Energy. Prosecutors alleged that Kramer and Reid entered profitable trades in one book called the "mark-to-market book," which allowed the market value of the contract to be recognized as earnings when the contract was originated. On the other hand, the prosecutors contended that unprofitable trades went into what was called "the accrual book," which contained transactions in which the realization of revenue was delayed until the product involved in the trade was actually delivered. The prosecution argued that the the effect of the dual booking of trades was to make the men appear more successful than they really were because only the mark-to-market book was used in computing bonuses. The defense essentially argued that the dual booking of trades was accepted company policy, that the defendants had no criminal intent and that any errors in the booking of trades were simply honest mistakes.

Posted by Tom at 4:00 AM | Comments (2) |

December 6, 2005

Ripples from the Wright Amendment compromise

Following on this post from last week regarding this year's compromise over the dubious Wright Amendment, this Fort Worth Star-Telegram article reports that American Airlines will move some of its planes to Love Field to compete with Southwest Airlines' new flights to St. Louis and Kansas City. Those are the two new interstate destinations that can now be flown to out of Love Field as a result of this year's modification of the Wright Amendment.

According to the article, American rationalizes the move by noting that many of its best customers in Dallas prefer Love’s closer-in location. But how many of those Highland Park-types are going to be going to Kansas City and St. Louis? I could understand American's move if Love Field had been opened up to fly into New York or Los Angeles, but not St. Louis and Kansas City. This appears to be a money-losing move for the indirect purpose of keeping the Wright Amendment in place and, from my vantage point, that is the type of decision that has had American tailing Southwest financially over the past several years.

Update: Virginia Postrel, who has written extensively on the folly of the Wright Amendment, weighs in here.

Posted by Tom at 6:19 AM | Comments (0) |

A Grotian Moment

A "Grotian Moment" is a legal development that is so significant that it can create new customary international law or radically transform the interpretation of treaty-based law. The trial of Saddam Hussein is such a moment, and this Case Western School of Law blog is providing expert commentary on the legal and foreign policy implications of arguably the most important international trial since Nuremberg. The subject of the latest post is former U.S. Attorney General Ramsey Clark, who is a member of Saddam's defense team. The post's author -- Case Western international law professor Michael Scharf -- notes the following:

Clark is known for turning international trials into political stages from which to launch attacks against U.S. foreign policy. He has represented Liberian political figure Charles Taylor during his 1985 fight against extradition from the United States to Liberia; Elizaphan Ntakirutimana, a Hutu leader implicated in the Rwandan genocide; PLO leaders in a lawsuit brought by the family of Leon Klinghoffer, the wheelchair bound elderly American who was shot and tossed overboard from the hijacked Achille Lauro cruise ship by Palestinian terrorists in 1986; and most recently Slobodan Milosevic, the former leader of Serbia who is on trial for genocide before the International Criminal Tribunal for the Former Yugoslavia in The Hague.

Sounds just like your typical former U.S. Attorney General, doesn't it? ;^)

Posted by Tom at 5:51 AM | Comments (1) |

M.D. Anderson research center continues to grow

The Chronicle's Todd Ackerman reports that the University of Texas M.D. Anderson Cancer Center has received a $20 million donation from Lowry and Peggy Mays as the cancer center continues raising funds for its 116 acre research park under development about a mile and a half south from the main M.D. Anderson hospital complex in Houston's Texas Medical Center. The Mays gift to M.D. Anderson comes on the heels of an earlier $30 million gift from the Red McCombs family. Mr. Mays built San Antonio-based Clear Channel Communications into the largest radio station company in the U.S.

Posted by Tom at 5:33 AM | Comments (0) |

Boston Scientific makes a play for Guidant

Boston Scientific Corp made a bid to become the largest heart device maker in the U.S. by making a $25 billion competing offer for Guidant Corp yesterday in an attempt to derail a troubled lower-price agreement between Guidant and Johnson & Johnson (earlier posts on the J&J bid for Guidant are here).

Boston Scientific's offer consists of $12.5 billion in cash and $12.5 billion in stock, values Guidant stock at $72 per share and would have Boston Scientific's shareholders owning 65% of the combined company. That represents a premium of 14% over the J&J offer, which values Guidant at $63.43 a share. The theory behind the Boston Scientific proposal is that a combined Boston Scientific and Guidant would become the leading U.S. company specializing in cardiac rhythm management ("CRM") equipment, which includes pacemakers and heart defibrillators that control rapid and potentially deadly heartbeats. In so doing, the Boston Scientific-Guidant alliance would attempt to become the primary company that doctors would look to for equipment and products to treat a wide range of cardiovascular ailments. Guidant's board is expected to evaluate in the next day or two whether Boston Scientific's proposal could lead to an offer superior to J&J's, which includes a $625 million breakup fee that Boston Scientific would have to pay J&J if Guidant accepts the Boston Scientific bid.

Nevertheless, Boston Scientific is David taking on the J&J Goliath in this battle. Boston Scientific's $22.5 market capitalization is about 1/10th that of J&J's, and the company's shares have fallen 22% during the past 12 months amid a decline in market dominance in the area of making heart stents that prop open arteries and help prevent heart attacks. Consequently, the proposed price is a big meal for Boston Scientific to eat and -- even given the troubled past of the J&J-Guidant deal -- J&J's greater size gives it a clear leg up if a bidding war breaks out. Nevertheless, Boston Scientific's bid is a gutsy move and clearly puts J&J in an awkward position. If J&J raises its bid, then that would contradict its recent moves to ratchet down the purchase price for Guidant. On the other hand, if J&J walks the deal, then the market could react negatively to the company's growth strategy. Accordingly, one move that J&J might make is to convert its deal from cash-and-stock to all cash, which might induce Guidant shareholders to accept less from the company in return for receiving all cash rather than part cash and Boston Scientific stock.

By the way, there is no word yet on how the Lord of Regulation will attempt to take advantage of the competing bids for Guidant. ;^)

Posted by Tom at 4:22 AM | Comments (0) |

December 5, 2005

The myth of the government cure-all

Sometimes it's hard to keep up with all the muddled thinking that is passed off as keen economic insight in much of the mainstream media.

My thoughts along these lines started last week with this David Ignatius/Washington Post op-ed in which Ignatius extols the virtues of undertaking a "fundamental national mission, equivalent to President John F. Kennedy’s call to put a man on the moon" to solve everything from General Motors' current problems to dependence on foreign oil, Americans’ high living, and the decline of manufacturing in America. Ignatius' enthusiasm is fueled by Amory Lovins recent book, Winning the Oil Endgame: Innovation for Profits, Jobs and Security (RM Institute 2004), which calls for a big government plan of higher taxes and government subsidies to facilitate fundamental change in the materials used to build such big things as automobiles and buildings. Although Ignatius admits that he knows nothing about the financial viability of Lovins' big plan, that doesn't stop him from endorsing it enthusiastically:

I'm no technologist, so I can't evaluate the technical details of Lovins's proposal. What I like is that it's big, bold and visionary. It would shake an America that is sitting on its duff as foreign competitors clobber our industrial giants, and it would send a new message: Get moving, start innovating, turn this ship around before it really hits the rocks.

Of course, Ignatius ignores the little detail of what happens if those carbon-fiber composite automobiles that are created as a result of the government money don't sell all that well. I guess we'll just have to work around that later.

Meanwhile, on another front, that big, visible company that no one should like -- Wal-Mart -- continues to be a hot topic of misinformation. This round of criticism of the retail giant began after this John Tierney/New York Times ($)op-ed had the temerity to note that Wal-Mart is actually a good company that provides many benefits to its workers and the communites that it serves. That uncharacteristic pro-Wal-Mart stance provoked the standard the usual outcry of anti-Wal-Mart sentiment from the anti-capitalists in the media and government, including the following letter to the editor of the Times:

"The Good Goliath" (column, Nov. 29), John Tierney's defense of Wal-Mart, misses the point. Nobody denies that Wal-Mart offers low prices to consumers. What opponents of Wal-Mart's practices argue is that the social good of low prices must be balanced against other important values.

Putting our children to work in factories would cut costs to consumers, but we all believe that this is morally unacceptable and would hurt our country in the long run.

In the same way, many of us believe that Americans working hard at full-time jobs should not be receiving wages that keep them living in poverty without health care.

Now, let's get the letter-writer's thinking straight. Inasmuch as employers have the chief moral responsibility of providing philanthropic assistance to workers and the hugely profitable Wal-Mart can afford to pay higher wages (its owners can do without those profits, you know), Wal-Mart is greedy for failing to pay higher wages and fringe benefits to its workers.

Well, there is a reasonable position against Wal-Mart, but the foregoing is not one of them. Wal-Mart employs about 1.3 million people, which is about 1% of the American workforce. It is not a particularly profitable company -- it makes, on average, a net profit of about 3.5% on annual revenues of around $300 billion. Microsoft made more money than Wal-Mart on about $40 billion of sales in 2004.

Thus, Wal-Mart makes money by selling a lot of things to many people at small markups. Yet, because it is a big company, many people -- most of whom presumably don't shop at Wal-Mart -- assert that Wal-Mart exploits its workers who apparently can't get a job with an employer who would take proper care of them. Not mentioned in such common criticism is the fact that Wal-Mart's average starting wage of $9.90 per hour is already nearly double the national minimum of $5.15 per hour and that the company provides a wide range of medical insurance options to its workers, including health savings accounts. Implicit in the misdirected criticism of Wal-Mart is that the government really should do something about this unfeeling corporate behomoth.

Finally, on the "more government regulation of business is good" front, this Joseph Nocera/NY Times ($) op-ed concludes without any meaningful basis that the Sarbones-Oxley legislation has been a success in cleaning up the corporate scandals that provoked the legislation in the first place. Nocera -- who recently took the equally dubious position that Eliot Spitzer has lofty standards -- essentially begins with the conclusion that SOX is a good law and then uses mostly anecdotal statements from the legislation's supporters to buttress his conclusion.

However, Nocera's piece simply blows right over any real cost-benefit analysis of the legislation. For example, one of the primary purposes of SOX was to fix bad auditing, which presumably facilitated the corporate scandals beginning with Enron. But one of the primary results of the SOX legislation has simply been to enrich auditors. In the meantime, accounting scandals such at those at AIG and Refco continue to occur -- wait a minute, wasn't that what SOX was supposed to halt? Similarly, Nocera simply ignores the increasing number of public firms that are delisting because of the cost of complying with SOX, the negative impact of the increased cost of public equity financing resulting from SOX, and the decreasing supply of people who are willing to take the risk of serving as directors of a public company because of SOX. Successful legislation, indeed.

By now, you are probably asking the quite legitimate question of "where are you going with all of this?" My point is that all of the these proposed policies -- big government plans are good, big Wal-Mart is bad and should be controlled, and more government regulation of business is good -- rely on the underlying assumption that the exercise of governmental power is reasonable regardless of the cost. Ignored is the fact that the governmental action may well be flawed and either exacerbate the perceived problem or create another one that is worse. Thus, rather than relying on dubious assumptions of the benefit of governmental control, what is really needed is sound cost-benefit analysis of the effect that such proposed policies will have on beneficial risk-taking that creates jobs and generates commercial growth. From my vantage point, feeling good about the inspirational goal of more governmental control usually comes at the high price of denying the individual freedom that is complementary to a bustling economy.

Posted by Tom at 6:11 AM | Comments (2) |

Cashing in on criminalizing business

Eliot Spitzer makes no bones about using his position as New York attorney general to promote his campaign for governor, but he certainly isn't the only lawyer cashing in on the trend of criminalizing business to further one's career.

This Wall Street Journal ($) article from over the weekend reports that David Anders, the assistant U.S. Attorney who was the lead prosecutor in the recent cases against former WorldCom Chief Executive Bernard Ebbers and investment banker Frank Quattrone, plans to leave the Manhattan U.S. Attorney's office at the end of this year for a cushy job with the venerable New York law firm, Wachtell, Lipton, Rosen & Katz.

Now, Anders appears to be a competent lawyer who worked for a couple of big New York firms before going to the U.S. Attorney's office, so maybe he would have ended up at a big New York firm after working as an assistant U.S. Attorney, anyway. Moreover, he is certainly not the first lawyer to take advantage of the opportunity to move from government work to a more lucrative position in private practice. However, the willingness of Wachtell, Lipton -- one of the most profitable law firms in the U.S. -- to pay a high price to purchase the services of a lawyer whose claim to fame is obtaining a highly questionable conviction of Quattrone and an over-the-top life sentence for Ebbers is a rather sad reflection of the value that the market places on the ability to appeal to the public's envy and resentment while pursuing questionable prosecutions of the unpopular businessmen of the moment. So it goes in the wacky world of criminalizing corporate agency costs.

Posted by Tom at 4:34 AM | Comments (5) |

December 4, 2005

2005 Weekly local football review

Texas Longhorns 70 Colorado 3.

Just as this special Texas Longhorn football team exorcised the Stoops Curse earlier this season, the Horns annihilated Colorado and freed Longhorn fans everywhere from the nightmare of the 2001 Big 12 Championship game in delivering UT's first Big 12 Football Championship to their long-suffering coach, Mack Brown.

This one was not as close as the score indicates as the Horns scored their 70th point midway through the third quarter and essentially went to the belly series on offense after that. Most of the accolades go to the spectacular Vince Young and the Horns' offense, but the development of the Longhorn defense over the past two seasons is really what has set these past two Longhorn teams apart from Brown's previous UT squads. Last season, long-time college defensive whiz Dick Tomey joined the Longhorns staff and the Horns' defense displayed a toughness and tenacity that Brown's previous defensive squads had lacked. Then, after Tomey and UT defensive coordinator Greg Robinson departed for other programs after the 2004 season, Brown hired former Auburn defensive coordinator Gene Chizik, and the result has been an even more aggressive and cohesive Horns defensive unit. Most of the focus on the upcoming Rose Bowl/National Championship Game will revolve around the spectacular Young and the equally phenomenal USC running back Reggie Bush, but my sense is that, if the Longhorns are to win their first national football championship in 36 years, then it will be the performance of the Horns' defense that will be the difference.

Ravens 16 Texans 15

Oh, my. This is getting beyond ugly.

After Kris Brown's fifth field goal with 1:08 to go put the Texans (1-11) in position for their second win of the season, the Texans' defense again snatched defeat from the jaws of victory. Starting at the Ravens' 13 yard line, Ravens QB Kyle Boller completed 24-yard, 11 yard, and 35 yard passes to put the Ravens (4-8) in field-goal position, and then Matt Stover kicked a 38-yard field goal with 6 seconds left giving the Ravens the victory over the hapless Texans.

I worked while watching (in a very vague way) this game, which was one of the worst football games that I have ever seen at any level. The Texans fumbled five times, received 11 penalties for 93 yards, and QB David Carr was sacked five times and had one interception, which was returned for a touchdown. Despite that overwhelming incompetence, the Texans were able to stay in the game because the Ravens fumbled four times, had eight penalties and could muster only 73 yards rushing against the worst rushing defense in the NFL. The Texans now play Tennessee next week in Nashville, and then return home for games against Arizona and Jacksonville the following two weeks before the season ends mercifully at San Francisco on January 1st. The only question then will be how quickly will Texans owner Bob McNair clean house after that final game.

By the way, things have gotten so bad with the Texans that now even a prominent corporate law professor is dissing them.

Giants 17 Cowboys 10

This game was just about as ugly as the Texans-Ravens fiasco. The Cowboys (7-5) totaled 208 yards of total offense, had four turnovers, and looked as bad as the Texans for the the first half of the game. But Giants QB Eli Manning was only 12 of 31 for 152 yards passing and two picks as he effectively kept the Pokes in the game. Nevertheless, the loss -- coupled with the Pokes' excrutiating loss to the Broncos on Thanksgiving Day -- has now placed the Cowboys at serious risk of missing the playoffs. Their final month of the season is pretty brutal -- the Chiefs at home, then games at Washington and Carolina before finishing the season at home against the Rams.

Finally, congratulations are in order for the Houston Cougars, who accepted the Ft Worth Bowl's offer Sunday afternoon to play Kansas on Friday night, December 23.

Posted by Tom at 4:58 PM | Comments (2) |

The Stros' top ten minor league prospects

Major League Baseball's winter meetings take place in Dallas this week, and that's the time that the major league clubs really get serious about proposing and making free agent acquisitions and trades of players. Inasmuch as the Stros are definitely in the market for some hitting, it's timely that venerable minor league baseball prospect evaluator Baseball America has published its annual top ten list ($) of the Stros' minor league prospects.

The Stros organization has traditionally emphasized player development and current Stros GM Tim Purpura is a development guy, so expect that tradition to continue. The Stros farm system is best known for developing pitchers (think Larry Dierker, Don Wilson, J.R. Richard, Ken Forsch, Joe Sambito, Dave Smith, Shane Reynolds, Billy Wagner, Wade Miller, Roy Oswalt, Brad Lidge, etc.), but the club during the Biggio-Bagwell era has also generated a number of productive hitters, including Bidg, Lance Berkman, Richard Hidalgo, Bobby Abreu, Morgan Ensberg, and Jason Lane. Similarly, the core of the key performers on the Stros' 2005 World Series team were developed within the club's farm system (Berkman, Bidg, Ensberg, Lane, Roy O, Lidge, Chris Burke and Chad Qualls), and six rookies were on the Stros' World Series roster.

Despite such production, the Stros' farm system has slipped somewhat in recent years for several reasons, including the failure of the Stros to field a high-A farm club for a number of years, unproductive drafts and increased competition from other major league clubs for talent in Venezuela, where the Stros once dominated. As a result, the system probably will not generate much in the near future beyond righthanded pitchers Jason Hirsh and Fernando Nieve, and it will probably be at least another two seasons before a homegrown position player can challenge for a spot in the lineup.

As a result of the talent decline in farm system, former Stros GM Gerry Hunsicker reassigned former Stros scouting director David Lakey after the 2004 draft and promoted coordinator of pro scouting Paul Ricciarini to be the new director of scouting. Ricciarini used the Stros 2005 first-round pick on lefthanded pitcher Brian Bogusevic then focused on good athletes who could turn into productive position players. Of those, outfielders Eli Iorg (supplemental first round) and Josh Flores (fourth round) join Bogusevic on Baseball America top ten list. Given this rebuilding phase in their farm system, the Stros will probably have to deal some of their numerous pitching prospects in trades if they are going to add the additional hitting that the major league club needs to remain a playoff contender over the next several seasons.

The following are Baseball America's ($) top ten Stros prospects, with my comments:

1. Jason Hirsh rhp; Age: 24 Ht: 6-8 Wt: 245. The best pitcher last season at AA Corpus Christi, Hirsh throws in the mid-90's mph and will probably start the 2006 season at AAA Round Rock. However, it would not be shocking if he were to make the 2006 Stros roster out of spring training either as a back-end rotation starter or as a setup relief man. Could you imagine a more physically intimidating trio of relievers on one team than Hirsh, Qualls and Lidge?

2. Troy Patton lhp;Age: 20; Ht: 6-1 Wt: 185 (earlier post here). In his first full season of minor league ball, the lefthanded pitcher from Tomball set a low Class A Lexington record with 32 straight scoreless innings, pitched in the All-Star Futures Game and reached high Class A. He throws in the low 90's mph, and will probably start the 2006 season as a 20 year old starter in AA ball. That means he is a stud.

3. Fernando Nieve, rhp; Age: 23; Ht: 6-0 Wt.: 200. Although only 23, Nieve is a Venezuelan who has already been in the Stros farm system for six years. He split the season last year at AA Corpus and AAA Round Rock, and -- but for an appendectomy -- probably would have been called up in September by the Stros. Another fireballer, he lacks Hirsh's polish, but could make the 2006 Stros roster if the Rocket decides not to play.

4. Jimmy Barthmaier, rhp; Age: 22; Ht: 6-4, Wt.: 210. Did I mention that the Stros have some strong pitching prospects? Another big fireballer, this 13th rounder really made strides last season in his third season of minor league ball and is projected to pitch at least part of the 2006 season at AA Corpus Christi. All of the Stros top four pitching prospects could be pitching for the parent club by the end of the 2006 season.

5. Eli Iorg, of; Age: 23 B-T: R-R; Ht: 6-3 Wt.: 200. Iorg is a good athlete/outfielder who the Stros drafted out of college after he had taken a year off to complete a Mormon mission obligation. As with most of the Stros' position player prospects, Iorg is a bit old for his level in the minors, so look for the Stros to push him toward high-A Salem and maybe even AA Corpus Christi during the 2006 season.

6. Hunter Pence, of; Age: 22 B-T: R-R Ht: 6-5 Wt.: 210. The Stros top pick in the 2004 draft, Pence is a good athlete who was the Stros best minor league hitter last season despite missing time with a pulled leg muscle. He will start the 2006 season at AA Corpus Christi and, if he continues to pound the ball the way he did in A ball, I would not be surprised to see him playing at AAA Round Rock during the 2006 season.

7. Felipe Paulino Del Guidice, rhp; Age: 22; Ht: 6-2 Wt.: 180. Another one of the Stros' seeming inexhaustible supply of flamethrowing prospects, Paulino Del Guidice is a Venezuelan has been timed throwing over 100 mph. Although he will begin the 2006 season as a starter at high-A Salem, some in the Stros organization are projecting him as a closer.

8. Juan Gutierrez, rhp; Age: 22; Ht: 6-3 Wt.: 200. Another one of the Stros' hard-throwing Venezuelan pitching prospects, Gutierrez had his best season in the minors last season. He will begin the 2006 season at high-A Salem, but expect him to reach AA Corpus Christi during the season.

9. Brian Bogusevic, lhp; Age: 22; Ht: 6-3 Wt.: 211. With the injury to Carlos Hernandez and the slow development of Wandy Rodriguez, the Stros are a bit deficient in left-handed pitching, so the club supplemented its 2004 drafting of Troy Patton by using its first pick (24th overall) in the 2005 draft on the lefty Bogusevic, who had a very good college career at Tulane. Inasmuch as Bogusevic endured a long college season before being drafted last season, the Stros didn't let him pitch much in rookie ball last season. So, the 2006 season will really be Bogusevic's first true season in minor league ball and he should move up to at least high-A Salem during the season.

10. Josh Flores, of, Age: 20 B-T: R-R Ht: 6-0 Wt.: 195. Flores is an interesting prospect, a former national junior college batting champ who tore up rookie ball last season after being drafted. He is as fast as Willy Taveras, but has hitting ability and power that Taveras can only dream about. Flores will begin the 2006 season at low-A Lexington and is several years away, but this is one of those prospects who could turn out to be something special. Keep an eye on him.

Posted by Tom at 11:27 AM | Comments (0) |

December 3, 2005

Go Raiders!

Texas Tech's football team (9-2) has had a fine season and will probably represent the Big 12 in the Cotton Bowl, although that final victory over Oklahoma was a bit tainted. Nevertheless, a mere tainted victory couldn't stop a Tech fan in this hilarious video from proclaiming (loudly) his allegiance to the Red Raider nation during post-game media interviews. Hat tip to the Georgia Sports Blog for the link.

Posted by Tom at 8:24 AM | Comments (1) |

Hearing on Olis resentencing scheduled

This Chronicle article reports that the hearing on the re-sentencing of former Dynegy executive Jamie Olis will take place on Thursday January 5, 2006 before U.S. District Judge Sim Lake, with briefs due on the resentencing issues on December 20 and 27. The resentencing hearing follows the Fifth Circuit overturning Olis' 24 year sentence last month in a widely-anticipated ruling.

Interestingly, the docket entry regarding Olis' resentencing indicates that two other former Dynegy executives — Olis' former boss, Gene Foster, and former in-house accountant Helen Sharkey — will also be sentenced with Olis on January 5. Both Foster and Sharkey pleaded guilty to conspiracy in August 2003 for their roles in the allegedly fraudulent Project Alpha deal that also ensnared Olis. Foster testified against Olis during Olis' trial and implicated other former Dynegy executives — including former finance chief Rob Doty — but no one else has been charged to date. Under their plea deals, Foster and Sharkey face maximum sentences of five years.

According to the Chronicle article, Judge Lake declined Olis counsel's request on Friday to have Olis released from prison pending the resentencing hearing. In so doing, Judge Lake signaled his intent on resentencing by commenting that, despite the 5th Circuit's objection to the government's damages figure, Olis still "has a number of years to serve even under the most liberal interpretation of laws."

Beyond the human element, the Olis resentencing will be particularly interesting because of the disingenuous manner in which the Justice Department prosecutors asserted an outrageously high "market loss' figure to procure the egregious sentence against Olis in the first place. What was not well-known at the time was the fact that the Justice Department's market loss position during the first Olis sentencing hearing was contrary to the position that the Justice Department was advocating at the same time in another case before the Supreme Court, Dura Pharmaceuticals v. Broudo. In Dura, the Supreme Court adopted the position that the Justice Department advocated in that case -- i.e., that plaintiffs who claim securities fraud must prove a connection between a misrepresentation and the corresponding investment's subsequent decline in price. In contrast, the prosecutors in the first Olis sentencing hearing used a price inflation theory of causation -- which the Justice Department and the Supreme Court both expressly rejected in Dura -- in asserting an absurdly high market loss figure allegedly resulting from Olis' acts.

Posted by Tom at 4:30 AM | Comments (1) |

December 2, 2005

Big private equity funds bet big on new Houston E&P company

Two large private equity funds -- Carlyle/Riverstone and Goldman Sachs Capital Partners -- announced yesterday that they are investing $500 million in Cobalt International Energy LP, a new Houston-based exploration company comprised mainly of former Unocal Corp. executives. Former Unocal president Joe Bryant orchestrated the deal and will be the CEO of Cobalt. The Chronicle article on the deal is here.

Although the investment is relatively small by oil and gas industry standards, the investment reflects an increasing trend of private equity funding a proven management team in a promising industry. Given the relatively small capitalization, Cobalt will identify new prospects and then hedge its risk by laying off a substantial portion of its interest in the prospect to investment partners who will share the risk of capital-intensive drilling and completion activities on the prospects, particularly in regard to the deepwater prospects in the Gulf of Mexico that will be one of the company's target areas.

Posted by Tom at 7:07 AM | Comments (0) |

Unintended consequences of indulging the Lord of Regulation

I wonder how many American International Group, Inc. shareholders are glad that the Lord of Regulation ridded the company of its supposedly fraud-indulging former CEO, Maurice "Hank" Greenberg?

This Wall Street Journal ($) article reports on some interesting new competition that AIG is facing in its key Chinese markets:

American International Group Chief Executive Martin Sullivan made the rounds at a gathering of multinational CEOs a month ago, meeting Chinese officials -- some for the first time -- whom he must cultivate to build up the insurance giant's business here.

But across the room, a different American magnate was holding court, with a large group of Chinese officials he had known for decades. When they saw him, they warmly greeted their old friend -- AIG's longtime former chief, Maurice "Hank" Greenberg.

People at AIG used to joke that its letters stood for "All Is Greenberg," and in China, that was especially true. The chairman and CEO controlled virtually every facet of AIG's China operation. Now AIG, having ousted him amid accounting probes, is scrambling to get its arms around the Chinese operation. And it is running into an unexpected bidder for Chinese financial business: The 80-year-old Mr. Greenberg himself.

Armed with a $25 billion-plus nest egg at former AIG affiliates he still heads, Mr. Greenberg is holding talks with Chinese companies about joint ventures in financial services, energy, the environment and technology, according to people working with him. He is tapping into a network he built up in three decades of visits here, one that made AIG the sole Western company allowed to sell life insurance on its own in China.

Mr. Greenberg's efforts also represent a chance at redemption following the unceremonious end of his long AIG career this spring. Mr. Greenberg, who has a Hong Kong house and calls China his second home, says, "It's good to be here. The Chinese are very loyal."

H'mm. "The Chinese are very loyal" as opposed, to say, the AIG board?

Posted by Tom at 6:30 AM | Comments (0) |

The Horns' recurring nightmares

As Houston prepares for the Texas Longhorns to win their first Big 12 Football Championship tomorrow at Reliant Stadium, I have detected an unusual reserve among the Longhorn supporters. It's a bit hard to describe, but it's definitely noticeable -- sort of like UT fans are telling each other "let's not get too excited just yet; there may still be a train wreck looming out there" as the Longhorns march on to to their widely-anticipated Rose Bowl game against USC for the BCS National Championship.

A friend who is a grizzled veteran of the college football wars described such uncharacteristic lack of confidence in the following manner: "The Horns have not really been a truly elite team in college football for over a generation now, since the strong teams of the late 60's and early 70's. Thus, among current college football fans, the Longhorn program is sort of like the Roman Empire -- very good a long, long time ago."

My friend has a point. After legendary coach Darrell Royal retired in 1975 and until this magical season, Longhorn football fans have endured years of relative misery. During that span, programs such as Oklahoma, Nebraska, Miami, Florida State, Florida, USC, LSU, and Alabama have all ascended at various times to become the type of elite college football program that Longhorn faithful believe is UT's birthright. The following are just a few of the heartbreaks that Longhorn fans have endured the past few decades:

The less-than-Royal-like coaching tenures of Fred Akers, David McWilliams, and John Mackovic;

The failure of Longhorn teams to win national championships despite the exploits of Heisman Trophy running backs Earl Campbell and Ricky Williams;

The Horns' gut-wrenching loss to Georgia in the 1984 Cotton Bowl game that blew a chance for the national championship;

The humiliating early 1990's Horns loss to a clearly-superior Miami team in the Cotton Bowl;

Current Longhorn coach Mack Brown's Stoops Curse, which was finally exorcised just a couple of months ago.

However, all of the foregoing disappointments may pale in comparison to the 2001 Big 12 Championship game, in which Horns QB Chris Simms melted down before a national television audience as UT blew the Big 12 Championship and a BCS bowl berth to a Colorado team that the Horns had beaten 41-7 earlier that season. Thus, while the Longhorn faithful prepare to celebrate tomorrow's expected victory in the Big 12 Championship game over a Colorado team that the Horns beat 42-17 earlier this season, this hilarious Burnt Orange Nation retrospective on that 2001 game should give pause to all Longhorn fans. Although my sense is that the Horns will win easily tomorrow -- primarily because Vince Young is no Chris Simms -- stranger things than a Colorado upset have occurred during the Longhorns' long journey back to elite status on the national college football stage.

Posted by Tom at 5:14 AM | Comments (1) |

More Enron indictments on the way?

As anticipated in this earlier post, U.S. District Judge Sim Lake concluded in a hearing yesterday that the defense team of former key Enron executives Ken Lay, Jeff Skilling and Richard Causey had not established in his mind that prosecutorial misconduct caused several clients of two Houston criminal defense attorneys not to assist the defense in preparation for the upcoming trial of the Enron Task Force's legacy case of its four year Enron investigation.

Judge Lake's ruling on the witness intimidation evidence was not surprising, as the Lay-Skilling-Causey defense team has struggled with the reality that no witness under the threat of retaliation from the Task Force is going to testify -- or allow their attorney to testify -- about that threat. However, compelling evidence of the Task Force's intimidation of witnesses in Enron-related prosecuctions still exists (see also here), and the larger issue in the trial -- the Task Force's unprecedented fingering of over 100 unindicted co-conspirators -- remains unresolved and clearly troubling to Judge Lake.

In addition to the chilling effect on exculpatory testimony from potential defense witnesses who have been fingered as unindicted co-conspirators, the Task Force intends to rely heavily during the Lay-Skilling-Causy trial on hearsay testimony from prosecution witnesses who have copped pleas about alleged statements made by various of those alleged co-conspirators. The defense is attempting to limit the prosecution's use of such hearsay testimony, and Judge Lake ordered the parties yesterday to brief him as he wrestles with the issue of whether to allow any such testimony -- and, if so, how much -- to come into evidence during the trial.

Finally, during the hearing yesterday, comments of the Task Force prosecutors and the other attorneys involved in the hearing indicated that the Task Force is preparing to have the grand jury investigating Enron issue another indictment in the near future against other former Enron executives who have not yet been indicted on any charges. The timing of the new indictments is transparent, given that the Task Force knows that publicity about more Enron executives being arrested will be beneficial for the jury pool to hear immediately before the beginning of the upcoming Lay-Skilling-Causey trial. You might recall that the Task Force pulled a similar stunt by publicly announcing the plea bargain of former Enron North America executive Chris Calger on the day that the jury in the trial of the Enron Broadband case began deliberations. The subject of the upcoming indictments remains unclear, but I suspect that it probably relates to the transaction involved in the Calger plea bargain (related post here).

Posted by Tom at 4:16 AM | Comments (0) |

December 1, 2005

Indulging the Wright Amendment

Well, this year's Congressional machinations over the Wright Amendment are over and the outcome is about as satisfying as one of those hard-fought football games that used to end in a tie before the era of overtime. Rather than simply repeal the damn thing, Congress decided in a transportation bill to lift only the Wright Amendment restrictions on Southwest Airlines flights out of Dallas' Love Field to Missouri. Thus, north Texans will now be able to fly direct from Love Field to St. Louis and Kansas City.

This Ft. Worth Star Telegram article notes an expert's estimate that the result of the modification of the Wright Amendment will be that American Airlines -- which controls most of the D/FW Airport -- will lose up to $115 million in revenue because of new competition, Southwest Airlines will pick up about $80 million and consumers -- often overlooked in the debate over the Wright Amendment -- will save about 25 percent on fares. So, not a bad result overall, particularly given that an outright repeal of the Wright Amendment is not politically feasible, at least as of yet.

However, I find it ironic that the Wright Amendment was enacted to facilitate the growth of the D/FW Airport. The effect of the legislation is now having quite the opposite effect. D/FW is underutilized with numerous empty gates and very few low-cost airlines -- JetBlue, for example, recently opted to fly out of Austin rather than D/FW. Consequently, American Airlines now controls about 85% of D/FW's business, which is good for American's business, but not good for consumers seeking the lowest possible fares.

Meanwhile, there is not much question on how most North Texans feel about the repeal of the Wright Amendment. Given the heavy public support for repeal, the real reason for some politicians' opposition to repeal becomes even clearer. Could it have something to do with the fact that American Airlines stock -- which traded at under $2 a share as recently as early 2003 -- now trades at over $17 a share?

Posted by Tom at 5:56 AM | Comments (5) |

Houston's Theater District

My family and I enjoy attending events in Houston's fine downtown theater district, so I am pleased to see that the district has put together this handy and good-looking website. Houston is one of only five U.S. cities with permanent professional resident companies in all of the major performing arts disciplines of opera, ballet, music and theater, and its theater district is wonderfully-centralized in a several block area of downtown Houston. Check out the website and attend a show in the theater district during the holiday season -- it's a great way to spend an evening or weekend afternoon.

Posted by Tom at 5:23 AM | Comments (0) |

Avoiding GM's Enronesque experience

General Motors' seemingly intractable descent into chapter 11 has been a common subject here, so I took notice of this Sean Gregory/Time magazine article that explores the following question: why are the U.S. manufacturing plants of foreign automakers thriving while GM is shuttering nine of its plants?:

According to the Center for Automotive Research (CAR), the number of manufacturing jobs created by foreign-based automakers in the U.S. has risen 72% since 1993, to about 60,000. (The Big Three currently account for around 240,000 manufacturing jobs in the U.S., down from 340,000 in 1993.) The Asian companies have grown the fastest. Toyota, which plans to overtake GM soon as the world's largest automaker, has 11 U.S. plants and expects to open a truck factory in San Antonio, Texas, in 2006. European brands, including BMW and Mercedes-Benz, are also growing. CAR estimates that foreign automakers operating in the U.S. add 1.8 million jobs to the American economy, including white-collar, dealership and supplier positions--from partsmakers to the bartenders at post-whistle watering holes.

Why do overseas firms seem to thrive, building profitable cars with U.S. workers, while Detroit languishes? For example, in the first quarter of 2005, Nissan made $1,603 on every vehicle sold in North America, while GM lost $2,311, according to Harbour Consulting. For starters, the transplants, generally with reputations for higher quality than American brands, don't offer the deep discounts that U.S. makers employ. And foreign manufacturers don't carry the legacy costs that drag U.S. companies down. Workers at foreign companies' nonunion shops make roughly the same in wages and benefits as unionized employees in Detroit. But Asian and European firms, with younger workforces in the U.S., aren't saddled with crippling pension and health-care obligations. GM spends $1,525 per vehicle in the U.S. on health care, compared with $300 per vehicle at Toyota.

Thanks to newer technology, the foreign manufacturers are more efficient too. The Big Three are closing the productivity gap; GM takes 23 hours of labor to produce one vehicle, down from 32 hours in 1998. But that's still longer than Toyota's 19.4 hours per vehicle and Nissan's 18.3. The real question, of course, is what kind of cars Americans want. Honda's timing at East Liberty was near perfect: its fuel-efficient Civic rolled off the line just as consumers were looking for ways to save on gas costs. "We're in a battle for survival right now," says CAR chairman David Cole. "Without decisive action, the domestics will not stay in the game."

It doesn't seem that long ago that GM and Ford were doing well selling high-margin SUV's and trucks. However, people's taste tends to change over time and higher gasoline prices have a way of persuading folks that they don't need all that space that SUV provides. Rather than plan for such changes, GM and Ford bet on the continuing popularity of their big brands, and now they are ill-equipped to compete with Toyota and Honda's slicker, gas-efficient models. Higher health care and legacy costs are certainly burdensome for GM and other American auto manufacturers, but better planning during the go-go days of a relatively short time ago probably would have avoided the Enronesque experience that GM is experiencing now. Hat tip to Daniel Drezner for the link to the Time article.

Meanwhile, Brad DeLong -- referring to this Robert Samuelson WaPo piece -- opines on what ails GM:

As I see it, GM has three big problems:

It paid its workers in the 1980s and 1990s in backloaded pension and health care benefits so that now workers have cash-flow rights but no control rights over the corporation, and this is an unstable and dangerous corporate control situation. Oligopoly profits have been built into GM's wages for a long time, and these oligopoly profit components are very "sticky" -- they remain even though the oligopoly profits are long gone.

GM management has bet very heavily on a low price of oil and a high price of SUVs.

Samuelson thinks that these are less important than (4): a culture of management that focuses on maintaining stability rather than taking advantage of change. He may be right.

Posted by Tom at 4:39 AM | Comments (0) |

November 30, 2005

At least Wagner is consistently classless

This earlier post from yesterday noted the dubious decision of the New York Mets to pay former Stros closer Billy Wagner $43 million over the next three seasons with an option for a fourth season that could push the total compensation to over $50 million.

One thing that I forgot to mention in that earlier post was the classless way in which Wagner publicly criticized Stros owner Drayton McLane before and after McLane traded him to the Phillies. McLane has his faults, but Wagner's outburst blasting McLane was way over-the-top considering that McLane is by far the best owner that the Stros have ever had.

So, with that backdrop, I was not particularly surprised when I saw this Philadelphia Inquirer article regarding Wagner's comments on the way out of Philly:

On his first day as New York Mets closer, Billy Wagner came out throwing heat at his old team.

He trashed the Phillies' commitment to winning, wondered about their plan for this season, and said he'd likely still be with the club if it had been willing to give him a three-year, $24 million contract in July.

"There's a difference between winning and being competitive," Wagner said. "In the end, I thought [the Phillies] were more interested in being competitive than winning."

Wagner was not surprised that the Phillies weren't more aggressive.

"Not considering I gave them three for 24 [three years and $24 million] at the trade deadline and they laughed at me," he said.

Phillies assistant general manager Ruben Amaro took umbrage with that comment.

"That's untrue," he said by telephone from Philadelphia. "No one laughed. The reason we were taken aback was that his original asking price was two years and $16 million. When we offered that, the asking price changed to three years at $24 million."

The Phillies were unwilling to offer three years in July because Wagner turned 34 that month and the team had concerns about the long-term health of his left shoulder. Wagner had spent time on the disabled list with a strained shoulder in 2004.

Like his predecessor, Ed Wade, new general manager Pat Gillick made keeping Wagner a top priority. Gillick improved the Phillies' offer to three years and was willing to add a fourth-year option, but it wasn't enough.

"If Pat had gotten there earlier, I think he could have gotten something done," Wagner said. "He didn't have much time."

Gillick and Wagner had one face-to-face meeting and the pitcher, at the time, said he was impressed with the new GM's plan.

Yesterday, Wagner made an about-face.

"For me, the question I had all along was I wanted to know their plan for getting relief and starting pitching and they really didn't have answers because Pat just got there," Wagner said.

"While the Phillies were getting rid of one guy, the Mets were buying up talent, and that's hard to overlook."

The "talent" Wagner referred to is slugger Carlos Delgado, whom the Mets picked up the same day the Phillies traded Jim Thome to the White Sox last week.

[Wagner's] legacy in Philadelphia may end up being the left-field wall at Citizens Bank Park. He frequently complained about it being too close. This week, construction crews will begin moving the wall back.

Wagner, at times, also complained about how close fans were allowed to get to the bullpens in Philadelphia, and how they would deride relievers during the game.

My bet is that, in a year or so, the Phillies will look at this deal as a good one that they elected not to make, just as the Stros have realized with regard to the Beltran deal.

Posted by Tom at 8:07 AM | Comments (2) |

Strained relations?

Does anyone else get the impression that negotiations regarding Rice University head football coach Ken Hatfield's future with the program don't seem to be going all that well?

First, this ESPN.com article reports on the rather defiant press conference that Coach Hatfield called yesterday in which he denied that he is going to resign and talked about the upcoming 2006 season.

This morning, the Chronicle is reporting that Coach Hatfield and Rice are finalizing arrangements for the coach's resignation.

In comparison, Texas A&M's head coach Dennis Franchione handled the shakeup of his staff via an email press release.

You know things are changing in the world of college football when Texas A&M handles the firing of a football coach better than Rice.

Posted by Tom at 7:01 AM | Comments (0) |

Icahn bears down on Time-Warner

Carl Icahn has provided this blog with some interesting fodder for posts over the past couple of years, and it looks as if the hedge fund investor is primed to do it again with his announcement yesterday that he intends to field a slate of directors to seek a majority on Time-Warner's 14-member board while hiring Bruce Wasserstein and Lazard Ltd. to help him win the proxy fight.

Icahn and a group of supportive investors have accumulated nearly 3% of the $85 billion media company in recent months amidst a publicity campaign that has highlighted the mistakes of current Time Warner management, including selling Warner Music Group and a big stake in the Comedy Central cable channel at what Icahn called "fire sale prices" and failing to remove the directors who approved Time Warner's disastrous merger with America Online in 2001. Ironically, Wasserstein lobbied to be named an adviser to the old Time Warner after the company hatched its ill-fated $140 billion deal with America Online Inc. in 2000.

The relationship between Icahn -- who usually acts on his own -- and Wasserstein and Lazard reflects the changing dynamics of such big deals, where hedge fund activists such as Icahn are taking increasingly aggressvie positions in public companies and investment banks are being attracted to serve the hedge fund's interests as opposed to the traditional role of advising the target company. Keep an eye on this battle as Icahn's activism will force Time Warner's management to provide a clear vision for the company's future, which is never a bad thing for investors.

Posted by Tom at 6:32 AM | Comments (0) |

Calpine on the brink?

This Reuters/NY Times article reports that Peter Cartwright, the 75-year-old founder and chief executive of Calpine Corp., and Robert Kelly, the company's CFO, resigned under pressure from the Calpine board amidst widespread speculation that the company is going to commence a corporate reorganization under chapter 11 a week after an adverse Delaware court ruling restricted the company's ability to use cash from some of its asset sales. Calpine stock -- which traded as high as $56 a share in 2001 -- was down 71 cents to 54 cents a share as of the close of New York Stock Exchange composite trading yesterday.

Mr. Cartwright's departure is widely viewed as the end of his goal to create a massive national power wholesaler in deregulated markets that could sell electricity without being limited to serving a specific territory or utility. Cartwright began the strategy in the mid-1990s and racked up $17 billion in debt as the company built a huge fleet of gas-fired plants in an effort to become the biggest power generator to wholesale power markets that had been deregulated and utilities that were leaving plant development to others. However, the company's strategy has been under pressure over the past several years from increasing natural-gas prices (which ratchet up the fuel cost of the company's power plants) and lackluster profit margins on the sale of wholesale electricity. That set the stage for the company's sale of assets and the shut-down of money-losing power plants, which in turn led to last week's adverse court decision. That decision concluded that Calpine had improperly spent $313 million on fuel for its power plants that came from $852 million in proceeds from the sale of assets that were collateral for corporate notes.

Interestingly, a few years back, with Calpine's stock trading around $40 a share, Cartwright refused to have the company sell shares to raise capital because he did not want the dilution that would result from the stock issues. So instead, he took on the $17 billion in debt. Now, natural gas prices have tripled, Calpine has lost almost $700 million so far this year, the company can't pay interest on its debt, bankruptcy looms, Cartwright is gone and the stock is at 20 cents.

What was that about not wanting dilution?

Posted by Tom at 5:43 AM | Comments (2) |

Thinking about energy prices

This earlier post noted that even the Washington Post editors now understand the folly of Congress considering a windfall profits tax against oil companies as a result of the price spikes that resulted from temporary supply disruptions. The last time that Congress imposed such a tax (late in the Carter Administration), domestic oil production actually decreased by about 5%, which resulted in higher gas prices, and U.S. reliance on foreign oil inceased by about 10%.

Reflecting that markets tend to take care of supply problems if Congress just stays out of the way, this Wall Street Journal ($)/Russell Gold article (free version here) notes that the recent surge in natural gas prices has prompted major exploration companies to make huge investments in recovery of natural gas from unconventional fields located in the contintental United States. The unconventional gas fields contain natural gas that is locked in giant swaths of coal, sandstone or shale from which extraction is expensive and difficult. However, the increase in natural gas prices, coupled with new technologies that crack open these rocks and extract large quantities of gas, is touching off an exploration boom in such fields throughout the Rocky Mountains and in Texas.

Meanwhile, not to be outdone by the fruits of such boring capitalism, the world's favorite socialist of the moment -- Venezuela's Hugo Chavez -- has hooked up with the Kennedy Family and other northeastern U.S. anti-capitalists to supply some oil to U.S. consumers in the northeast at 40% below current market prices. This Opinion Journal piece scours the political motives of Chavez's "charity," but there is an even simpler problem with this dubious arrangement -- it does not make any sense for Chavez to sell oil at a 40% discount to people in the U.S. who are far richer than his constituents in Venezuela. Not exactly what I would call looking out for the interests of the little guy.

Posted by Tom at 5:00 AM | Comments (0) |

Toyota has a hybrid deal for you

The Wall Street Journal's Holman Jenkins has this clever column ($) today in the form of a fictional letter from Toyota to owners of its popular hybrid vehicle, the Prius. The main point of Jenkins' column is that hybrid technology is not really "green" technology at all. Rather, it's really just an expensive option that generates large markups for Toyota and its dealers. In so doing, Jenkins notes the following about the notion that a hybrid's supposed fuel efficiency makes up for its higher cost:

Let us assure you that the Prius remains one of the most fuel-efficient cars on the road. Toyota applauds your willingness to spend $9,500 over the price of any comparable vehicle for the privilege of saving, at current gasoline prices, approximately $580 a year.

And should the price of gasoline rise to $5, after 10 years and/or 130,000 miles of driving, you might even come close to breaking even on your investment in hybrid technology.

Posted by Tom at 4:36 AM | Comments (14) |

November 29, 2005

A great Houstonian

Samuel Ward Casscells, III is a 53 year old M.D. and professor of biotechnology at the University of Texas Health Science Center at Houston in Houston's amazing Texas Medical Center. He is also an Army medical corps reservist, and recently was awarded both the General Maxwell Thurman Award and the Army Meritorious Service Medal for his service during Operation Iraqi Freedom. In this Houston Chronicle op-ed, Dr. Casscells writes about the reason that he joined the military and the surprising experience that followed:

I had joined the Army Reserve for what seemed good reasons at the time: to help a hard-working medical corps, to live up to the examples of some of my heroes (Drs. Denton Cooley, James "Red" Duke, Michael DeBakey, and my father, surgical giants who wore Army green), and to set an example for my children.

It proved to be more than that: gripping, inspiring and filled with surprises. As only one in 200 Americans is in uniform today, most do not know any soldiers; hence this report.

One month after being commissioned, I received a phone call from Army Surgeon General Kevin Kiley: "Col. Casscells, welcome aboard. I want to be ready in case of a flu pandemic. You have some experience. We may even have some fun. Stand by for orders."

In a few months, I felt like a member of a big family. I would not say a team because there was so little rah-rah, and — to my surprise — no bragging, no macho, no arguing and very little politics. Even in the sand, with all the surgeons from Operation Iraqi Freedom, the focus was the mission: how to prevent and treat injuries and illness.

All suggestions were welcome. All are addressed by rank, but the general speaks as respectfully to the sergeant as to a colonel. And there is lots of laughing and gentle teasing (a perennial: the Air Force, always ready, will go anywhere — as long as there is a dry golf course, and cocktails).

[snip]

Equally wondrous to me: There was not a shred of racial awareness, much less tension. I finally had to ask. The answer is that, since President Truman integrated the Army Officer Corps in 1948, there have been several generations of advancement based on merit (which means hard work, smart work, but especially teamwork). Thus there are thousands of black officers who command with quiet confidence.

Read the entire piece. Hat tip to Clear Thinkers reader Byron Hood for the link to Dr. Casscells' inspiring op-ed.

Posted by Tom at 7:40 AM | Comments (0) |

Comparing bad off-season deals

Inasmuch as Roger Clemens still has not let the Stros know whether he is going to play next season, the Stros have been twiddling their thumbs so far this off-season considering silly notions such as re-signing Brad Ausmus rather than going out and competing for a couple of free agent hitters that the club really needs.

However, it helps me to remain optimistic about the Stros' management when I read that former Stros closer Billy Wagner has just taken the Mets to the cleaners for $43 million over the next three years with an option for a fourth season that could push the total compensation over $50 million. Now, don't get me wrong. Wagner is a very good closer and a lefty to boot. However, $50 million over four years for a 34 year old pitcher who had season-ending arm problems as recently as the season before last? Although Wagner's runs saved against average ("RSAA," explained here) was a very good 26 last season, he has had RCAA's of 10, 13 and 15 in three of the past five seasons. That's decent production, but not $12.50 - $14.3 million per year-type of production. The Stros will likely sign the more effective Brad Lidge for an annual salary probably around a third of what the Mets are paying Wagner.

With Jeff Bagwell's deal, the Stros are closing the book on their final long-term, overpriced contract. Inasmuch as those contracts limit the flexibility of a mid-market club such as the Stros to make the type of "tweaking" acquisitions necessary to remain competitive, I am glad that Stros management is not overbidding for high-priced stars (remember Carlos Beltran?). Nevertheless, the Stros need to be careful at overpaying -- albeit at a far lesser rate -- unproductive players such as Ausmus. Throw a couple of million at Ausmus, plus another million or so at an equally unproductive player such as Vizcaino, and -- after awhile -- you're talking about some real money.

Posted by Tom at 6:28 AM | Comments (1) |

Checking in on Krispy Kreme

I haven't checked in on beleaguered doughnut franchisor Krispy Kreme Doughnuts, Inc. in awhile, so I noticed the company's regulatory filing a week or so ago in which the North Carolina-based company announced that it is "highly unlikely" that it would be able to deliver its financial statements to lenders by a December 15 deadline. Although a publicly-owned company, Krispy Kreme has not filed a financial statement since September 2004 and is facing a January, 2006 deadline for having its stock delisted by the New York Stock Exchange. As the company continues the process of restating earnings by over $20 million for its first four fiscal years, the company's stock -- which traded at around $50 per share in 2003 -- is trading closer to $5.50 per share now.

So, can this trendy maker of delicious doughnuts stay out of tank? Probably not, but this Business Week Online article surveys the company's landscape and sets forth CEO Stephen F. Cooper's turnaround strategy, which is essentially to operate smaller stores and expand into foreign markets while selling more high-margin coffee. I've got my doubts about whether that's a winning strategy, at least without a formal reorganization under chapter 11, but who knows? Mr. Cooper agreed to a success fee based on 1.7 million warrants that are convertible into shares at $7.75, so he is clearly betting on the company's success. And the company still makes a good doughnut. However, as one commentator in the article notes, "the lines are no longer out the door."

Posted by Tom at 5:31 AM | Comments (0) |

November 28, 2005

The gift of a good book

If you are looking for a holiday gift idea, check out The New York Times Book Review's 100 Notable Books of the Year 2005, along with its lists for 2004 and 2003. For a time, you can review the Times' notable book lists from 1997 through 2002 here.

Posted by Tom at 5:58 AM | Comments (1) |

Aspirin as Vioxx?

In one of my earlier posts about the Merck/Vioxx case, I observed somewhat facetiously that the risks associated with aspirin would probably deter any pharmaceutical company today from making the investment necessary to bring the drug to market. In this Medical Progress Today piece, pharmaceutical expert Derek Lowe confirms that my speculation is almost certainly correct:

[I]f you were somehow able to change history so that aspirin had never been discovered until this year, I can guarantee you that it would have died in the lab. No modern drug development organization would touch it.

Thanks in part to advertisements for competing drugs, people know that there are some stomach problems associated with aspirin. Actually, its use more or less doubles the risk of a severe gastrointestinal event, which in most cases means bleeding seriously enough to require hospitalization. Lower doses such as those prescribed for cardiovascular patients and various formulation improvements (coatings and the like) only seem to improve these numbers by a small amount. Such incidents, along with others brought on by other oral anti-inflammatory drugs, are the most common severe drug side effects seen in medical practice.

It doesn't take too long to see these effects in a research program. Aspirin causes gastric lesions in rats and dogs, which are the standard small and large animal models for drug toxicity. This side effect occurs at levels which would raise red flags for any new compound. What would a present-day research organization do about it? If we stipulate that they could determine that aspirin worked by inhibiting cyclooxegenase enzymes, they would surely try to break the vascular effects of the drug apart from its anti-inflammatory effects. They would try to find new compounds that selectively inhibited only one of the enzyme subtypes. They would, in other words, produce Vioxx, and Celebrex, and the other COX-2 inhibitors, and this is just why these drugs were developed.

Read the entire piece. By the way, the third Vioxx trial against Merck cranks up this week in Houston federal court. And Ted Frank wonders why Mark Lanier has still not moved for entry of a judgment on the $253 million jury verdict in the Ernst case?

Posted by Tom at 5:22 AM | Comments (0) |

A lot about Alito

The ever-alert Tom Mighell passes along this handy AskSam database of over 350 of Supreme Court nominee Samuel Alito's published opinions, which can be viewed either online or after a download. Between this database and this previously-noted University of Michigan Law Library site, there is not much that you cannot find out about Judge Alito, whose confirmation hearing is scheduled to take place in January, 2006.

Posted by Tom at 5:01 AM | Comments (1) |

November 27, 2005

2005 Weekly local football review

Texas Longhorns 40 Texas A&M Aggies 29

The 5-6 Ags came up with an unexpectedly spirited performance for me behind redshirt freshman QB Stephen McGee (pictured) and true freshman RB Jovorskie Lane before the 11-0 Horns put the clamps on late to stay on course for their long-awaited BCS National Championship showdown with Southern Cal.

McGee and Lane were incredible, literally throwing the dispirited Aggie team on their shoulders and having the Ags in position to tie the score with just over 8 minutes left in the game. But Texas promptly tacked on another field goal, the Horns' defense didn't allow A&M another first down for the remainder of the game, and UT heaved a huge sign of relief as they pulled out the victory. The Horns finish their regular season on Saturday in the Big 12 Championship game at Reliant Stadium against overmatched Colorado and then it's on to the Rose Bowl in early January against USC.

Much has been made about the Aggies' disappointing season, but my sense is that it's too early for the Ags to banish Coach Fran from Aggieland. Coach Fran and his staff have been responsible for the past two recruiting classes (2004 and 2005), partially responsible for the 2003 class (with former coach R.C. Slocum's staff) and not responsible at all for the 2002 class. The Aggies basic problem is that they do not have enough good players in the junior and senior classes because, by my count, at least 17 of the 47 recruits in the 2003 and 2002 classes are no longer in the program. Losing a third of those older and more mature players left this particular Aggie team with little quality depth, and a bad spate of injuries -- particularly at the wide receiver and defensive back positions -- undermined that poor depth further. With a much more favorable schedule next season, along with another solid recruiting class and maturation of the previous two recruiting classes, Texas A&M's program should turnaround solidly next season and trend upward over the next several seasons. What is unclear, however, is whether Coach Fran has what it takes to compete against Mack Brown of Texas and Bob Stoops of Oklahoma at the top echelon of the rugged Big 12 South Division. That issue will ultimately be the pressure point for Franchione's success or failure at Texas A&M.

Houston 35 Rice 18

The 6-5 Cougars quixotic march to a bowl berth continued on Saturday as they allowed Rice to take a 10 point lead (nearly a 17 point lead) to start the game, and then reeled off 28 straight points as the 1-10 Owls coughed up the ball on four of their next six possessions after scoring on their first two series of the game. Although they do not draw well at home, the Coogs are actually an attractive prospect in the strange world of college post-season bowl games -- although frustrating, the team does play an exciting brand of ball and the team has always generated solid television ratings generally, and in the Houston area in particular, for past bowl games.

On the other hand, the Rice football program is at a crossroads. Coach Hatfield is a wonderful fellow, but he is running a throwback offensive system without the quality of athletes necessary to win with it and overseeing an Owls defense that has contributed greatly to the program's 18 losses in the past 22 games. As Richard Justice points out in this column, there are no easy answers for a program that has minimal support on campus and generates revenue for the athletic program primarily by playing the sacrificial lamb in early season games for programs such as Texas, UCLA and Florida State. Rice's football program is being propped up by a relatively small group of alumni who remember the glory years of Rice competing in the Southwest Conference and who realize that maintaining the Owls' elite baseball program would be difficult -- if not impossible -- if the Owls downgrade the football program to Division I-AA or lower. Rice needs to establish a new paradigm for its football program quickly or the program risks death by its own considerable weight.

Rams 33 Texans 27

The 1-10 Texans lost this one in a manner that even grizzled veterans of bad Houston professional football teams could not imagine. After going up by 21 points at halftime, the Texans scored only 3 points the rest of the game against a Rams secondary that was without its starting safety and both of its starting cornerbacks. Then, as if realizing that they were screwing up their place in the Reggie Bush sweepstakes, the Texans allowed the Rams' third-string rookie quarterback from that football factory Harvard to lead the Rams to 10 points in the final 27 seconds of the game to force overtime. Then, in a remarkable coup de grâce, the hapless Texans defense allowed the Rams to score from 56 yards out on a hitch pass to seal the loss in overtime.

How on earth does a 1-10 team get so overconfident during a game that they lose it?

The Texans go on the road to play bad teams at Baltimore and Tennessee over the next two Sundays, but those teams would really have to mail it in to lose to the Texans. 1-15 is looking like a distinct possibility.

Broncos 24 Cowboys 21

The 7-4 Pokes saved the turkey on Thanksgiving Day for overtime as their typically stout defense allowed journeyman Bronco RB Ron Dayne to take off for 50 yards to set up the winning field goal in overtime. The Cowboys most recent placekicker missed what would have been the game winning field goal in regulation, which means that the Big Tuna will probably go out this week and retain the Cowboys tenth placekicker of the season. Amazingly, however, with the Redskins and Eagles fading like cheap suits, the Pokes can take command of the NFC East this Sunday by beating the Giants in New York. The Pokes' four losses this season have been by a total of 13 points.

Posted by Tom at 4:05 PM | Comments (10) |

November 26, 2005

Joseph Nocera on the Grasso lawsuit

You have to hand it to New York Times business columnist Joseph Nocera -- he has certainly come up with a reason that most folks would not have thought of for why New York Aspiring Governor Eliot Spitzer should drop his propaganda campaign, . . . er, I mean, excessive compensation lawsuit against former New York Stock Exchange chairman Richard Grasso and the former chairman of the NYSE board's compensation committee, Kenneth Langone.

In this NY Times Select ($) column written in the form of a memo to Spitzer, Nocera starts off by snarking Clear Thinkers favorite Larry Ribstein for "gloating" over Spitzer's decision earlier in the week to drop fraud and larceny charges against Paul Flynn, the former Canadian Imperial Bank of Commerce executive who Spitzer had accused of aiding hedge funds in improper mutual-fund trading. Then, without ever mentioning the substance of Professor Ribstein's well-grounded criticism of Spitzer's dubious regulatory tactics, Nocera proceeds to urge the Lord of Regulation to drop the Grasso lawsuit not because it lacks merit, but because the lawsuit will probably not lead to the type of salutory business reforms that earlier Spitzer lawsuits have prompted -- "the Grasso suit doesn't meet the lofty standard you've set for yourself."

Are you kidding me? The phrase "lofty standard" being associated with Eliot Spitzer?

Does Nocera mean that lofty standard of indulging public envy and resentment of wealthy businesspeople by defaming Maurice "Hank" Greenberg (here and here)?

Or does he mean the lofty standard of criminalizing those who would take the risk of creating a market for home ownership for those who most need it?

Or is Nocera referring to that lofty standard of Spitzer creating employment opportunities for his chums?

Or maybe he means the lofty standard of Spitzer not coordinating his investigations with other agencies?

Or perhaps Nocera is contemplating the lofty standard of Spitzer interfering with the regulatory role of other governmental agencies (here and here and here)?

Or maybe he is simply referring to the lofty standard of Spitzer's not insubstantial contribution to the drive of U.S. governmental officials to criminalize everything?

Nocera is right that Spitzer should drop the Grasso lawsuit, but for the wrong reason. Spitzer should drop it because it's a cheap publicity stunt, which is hardly a "lofty standard."

Update: Professor Bainbridge does an even better job than the examples above in fisking Spitzer's "lofty principles."

Posted by Tom at 8:43 AM | Comments (3) |

November 25, 2005

Spitzer backs off criminal charges against Hank Greenberg

On my way out the door to College Station, I note that the Lord of Regulation simply cannot stay out of the news.

After publicly flogging former American International Group, Inc. CEO Maurice "Hank" Greenberg for months (note earlier posts here and here), New York Attorney General Eliot Spitzer has decided not to pursue criminal charges against Mr. Greenberg in his probe of the giant insurer's structured finance transactions, according to this Wall Street Journal ($) article. The WSJ reports that Spitzer has decided to focus on the civil-fraud allegations that he has already filed against Greenberg and AIG and leave any possible criminal fraud charges against Greenberg to federal prosecutors, who currently have ongoing criminal investigations over AIG in New York and D.C. Here is a Reuters article on the WSJ piece, and here are previous posts chronicling Spitzer's investigation into AIG and Greenberg.

The Aspiring Governor Spitzer certainly has been charitable to his subjects involved in his criminal investigations recently. Over the past several weeks, he has announced his decision not to re-try William Sihpol and dropped criminal charges against another executive in connection with his investigation into mutual-fund trading. Spitzer's decision not to prosecute Greenberg comes after public comments that led most folks to the conclusion that Spitzer had already decided to pursue criminal charges. Oh well, Spitzer should be complimented for finally making the right decision not to criminalize Greenberg's business calls -- if only Arthur Andersen had been so lucky.

In the meantime, AIG shares -- which lost about a third of their value during Spitzer's reign of terror against the company and Greenberg earlier this year -- have rebounded over the past several months. The shares currently trade at about 90% of their value as of the time that Spitzer took aim at AIG and Greenberg despite the company's lagging financial performance since Greenberg's departure as CEO. That raises the interesting question of just who does Spitzer think he is protecting in continuing to pursue his civil litigation against AIG and Greenberg?

Posted by Tom at 5:21 AM | Comments (0) |

November 24, 2005

Happy Thanksgiving!

Light blogging will be the norm over the next several days as I enjoy the holiday with my family and, on Friday, travel to College Station for the annual rivalry game between the Longhorns and the Aggies.

The 10-0 Horns are an uncharacteristic 27.5 favorite in that annual grudge match and are 9-1 against the spread during this magical season that appears to be heading to a Rose Bowl matchup with USC for the BCS National Championship. The 5-5 Aggies are only 3-7 against the spread this season, which reflects that this particular Aggie team has not met the expectations of the betting public, much less its rabid faithful. So, this one could definitely be a blowout, but the sociological implications of Texas v. Texas A&M are always entertaining to experience regardless of the score.

As you enjoy the holiday with friends and family, take a moment to read this heartwarming story by Clear Thinkers favorite Mickey Herskowitz, who has been the best Houston sportswriter over the past generation. Mickey is one of the wonderful people that makes Houston such a special place.

Have a joyous and restful holiday, and thanks for reading Houston's Clear Thinkers.

Posted by Tom at 7:01 AM | Comments (1) |

November 23, 2005

Dan Jenkins on Vince Young

As regular readers of my blog know, Dan Jenkins of Ft. Worth is my favorite sportswriter, bar none (previous posts on Jenkins are here, here, here, here and here). In this interesting David Barron article that explores where the 2005 edition of the Texas Longhorn team fits among the great teams of the past in the Horns' legendary football program, Jenkins makes the following hilarious observation about the 2005 Texas team and its star quarterback, Vince Young:

"Even if this team wins it all, the whole deal, in my mind it won't be the best Longhorn team of all time. That's because this team is led by an alien, not a human, and its biggest threat is a busted play where the alien goes back to pass, can't find a receiver, then runs over everybody for a touchdown."

"If Vince Young carried the ball on every play, Texas would win games 85-0. But that's not a team, it's a group of undistinguished guys led by a monster from outer space. Nobody outside of Austin can name another player on the 2005 team, other than, maybe, Jammal Charles. Nobody."

My vote for the best Horns team was the 1968 team, which lost and tied a game before Coach Darrell Royal said "what the hell" and switched to the Wishbone offense. After that key move, the '68 Longhorns dominated the remainder of their opponents in a manner unequaled by any of the Horns' national championship teams.

Posted by Tom at 8:23 AM | Comments (5) |

Spitzer spins his payola investigation

Apparently disturbed with the adverse publicity earlier this week emanating from the decision not to pursue this case, New York's Aspiring Governor fought back yesterday by announcing that he is continuing to protect all of us from that sordid business practice of payola -- i.e., radio stations owners accepting money from promoters to pay certain types of noise -- er, I mean, music -- over the airwaves. this NY Times article reports that Mr. Spitzer has reached a $5 million settlement with Warner Music Group Corp. for offering trips, gifts and agreements to cover operating costs in exchange for increased airplay for certain songs. Here is an earlier post on Mr. Spitzer's payola investigation.

By the way, the Wall Street Journal ($) article on the settlement included the following quote from Mr. Spitzer: "I never like to presume what an investigation will show or conclude." Oh, really?

Although certainly an effective vehicle for his gubernatorial campaign, Spitzer's payola investigation is simply another example of his misguided approach to regulating business (Larry Ribstein has been at the forefront of making this point). As with his many other forays, Spitzer has used the leverage of a criminal investigation to force the type of business regulations that he deems appropriate. But Spitzer's regulations are not developed under any legislative process and are not even reviewable under the normal administrative process for business regulations. In short, Spitzer's approach is regulation through force rather than the rule of law, without regard to whether the regulations that he is imposing are more costly to the public than the supposed wrongs that the regulations are supposed to correct.

Posted by Tom at 5:41 AM | Comments (2) |

The Times mudslings at the Texas Genco deal

You can't slip a deal past the New York Times in which too much money is being made.

In this article that is clearly intended to decry capitalists taking advantage of deregulated markets, the Times compares the sellers in the pending Texas Genco deal (more accurately described in earlier posts here and here) with the societal pariah Enron and then mischaracterizes the true risk that the sellers took on the deal.

I was going to criticize the Times' one-sided analysis of the Texas Genco deal, but then it occurred to me that such puerile analysis is utterly consistent with a news outfit that -- in the face of the public's increasing access to free online news sources -- responds to its sagging subscription sales by charging for its web content. For a more astute analysis of the transaction, note Dale Oesterle's observations on the deal over at the Business Law Prof Blog.

Posted by Tom at 4:50 AM | Comments (2) |

How does the Enron Task Force really feel about Arthur Andersen?

This earlier post noted the 180 that the Enron Task Force has recently taken in regard to defunct accounting firm Arthur Andersen. After demonizing the firm, gutting it with a misguided prosecution, and alleging that a number of the firm's former partners were co-conspirators in several Enron-related prosecutions, the Task Force is now embracing several former Andersen partners as prosecution witnesses in its upcoming legacy trial against former key Enron executives Ken Lay, Jeff Skilling, and Richard Causey. In short, after putting Andersen out of business as an accomplice of the evil Enron, the Task Force is now contending that Enron duped Andersen just like everyone else.

On the heels of that development, David Duncan, the former Andersen partner-in-charge of the Enron account at the time of the company's demise, earlier this week requested -- without opposition from the Enron Task Force -- that U.S. District Judge Melinda Harmon allow him to withdraw his previous guilty plea under this cooperation agreement for allegedly obstructing the federal investigation of Enron. Duncan had testified -- albeit ineffectively -- during the Andersen trial in 2002 as a Task Force witness against Andersen, and has been awaiting sentencing ever since.

Meanwhile, the Task Force also requested dismissal of its criminal case against Andersen after publicly stating that it was prepared to retry the case just a couple of weeks ago. As a result, the Task Force will not be providing an "Andersen annuity" for Andersen defense attorney Rusty Hardin after all.

The Task Force's decision to drop the misguided Andersen prosecution is at least somewhat consistent with the Supreme Court decision overturning the Andersen conviction and the Task Force's recent change of heart toward Andersen. However, the Task Force's decision not to oppose Duncan's motion to withdraw his acceptance of his plea deal with the Task Force is another clear sign of desperation in the Task Force as it prepares to go to trial in less than two months in its legacy case against Messrs. Lay, Skilling and Causey. My bet is that the Task Force is playing nice with Duncan to send him a signal that if he elects not to testify in the Lay-Skilling-Causey trial, then the Task Force will quietly back off the criminal case against him after conclusion of that trial. Such an approach with Duncan would be consistent with Task Force's tactic of trying to avoid having all relevant testimony and evidence considered during the Lay-Skilling-Causey trial.

Stepping back for a moment from the details of trial tactics, however, the Task Force's recent change of heart toward Arthur Andersen simply highlights the dubious nature of the Task Force's decision to prosecute Andersen out of business in the first place, depriving over a dozen communities of thousands of jobs in the process. Is there any adult supervision whatsoever within the Bush Administration's Justice Department? Ellen Podgor has more cogent thoughts here.

Update: The best mainstream media article that I have read on this development in the Enron-related criminal cases is this Carrie Johnson/Washington Post article, which includes the following quote from Clear Thinkers favorite, Larry Ribstein:

"There was an initial outbreak of moral condemnation after Enron and the bubble burst," said Larry E. Ribstein, a corporate law professor at the University of Illinois at Urbana-Champaign. "That was a time for people to take a deep breath. Instead, a lot of these things were rushed into prosecution, and now we're seeing the fallout."

Update II: Peter Henning agrees with me regarding the Task Force's purpose in not opposing Duncan's request to withdraw his plea bargain.

Posted by Tom at 4:00 AM | Comments (7) |

November 22, 2005

Phil Gramm, comedian

This CNN article reports that former Texas senator and presidential candidate (for about 15 minutes) Phil Gramm cut the crowd up yesterday while testifying as a witness in the public corruption trial of former Illinois Governor, George Ryan.

While running for President in 1996, the Gramm campaign paid a rather large "fee" to a Chicago-based "consultant" who turned around and funneled the money to Ryan's daughters and two aides while Mr. Ryan was serving as Illinois Secretary of State. Prosecutors allege that the consulting fee was Mr. Ryan's requirement for endorsing Mr. Gramm in the Illinois Presidential Primary that year. Asked by prosecutors whether he would have approved of the payments to the Ryan daughters and aides if he had known about them, Mr. Gramm replied that he would not have approved of them, explaining:

"It's sort of like the difference between love and prostitution," the folksy former Texas senator testified, drawing gasps and laughter from spectators at a hearing with the jury out of the room. "You don't pay people to like you."

By the way, a Gramm aide also testifed that, when questioning a Ryan aide about the unusually large size of the proposed "consulting fee," the Ryan aide told him:

"That's the way we do things in Chicago."

Hat tip to the ever-alert Ellen Podgor for the link to the CNN article.

Posted by Tom at 7:42 AM | Comments (2) |

Case against former Duke Energy traders goes to the jury

This Bloomberg News article reports that the criminal case against former Duke Energy traders Timothy Kramer and Todd Reid went to the jury yesterday in Houston federal court. Messrs. Kramer and Reid are charged with racketeering, conspiracy, wire and mail fraud, money laundering and falsifying corporate books in connection with an alleged scheme to book phony electricity and natural-gas trades to boost trading volumes and inflate profits in a trading book that was the basis of their annual bonuses (you can download a copy of the indictment here). A third former Duke Energy trader defendant -- Brian Lavielle -- previously copped a plea and testified against Messrs. Kramer and Reid during the trial.

This case is particularly interesting because it involves senior-level executives being accused of devising schemes to generate profits in a trading book by using "mark-to-market" accounting in calculating bonuses, on one hand, and entering losses in an "accrual book" that had no bearing on bonuses, on the other. Duke Energy and most other energy traders -- including Enron -- used mark-to-market accounting to record profit and loss for energy contracts that might not settle for years into the future. However, the mark-to-market accounting method has come under intense scrutiny since the demise of Enron Corp. in late 2001 because of the latitude that the method allegedly allows in recording profitable results in trading operations. From the report on the closing arguments in the case, it's unclear whether the defense made a big issue over the legality of mark-to-market accounting, but the result in this case is nevertheless being watched closely by defense lawyers who are defending white collar prosecutions that involve mark-to-market accounting issues.

Posted by Tom at 6:33 AM | Comments (2) |

Sony BMG's bad idea

Sony BMG's decision to implement a copyright-protection plan without telling anybody is shaping up to be one of the costliest decisions that the company has ever made.

Earlier this month, a computer-security researcher publicly revealed that some of Sony BMG's CDs secretly install a program known as a "rootkit," which is difficult to detect or remove from a computer and which can act as a back door for a malicious programmer to take remote control of a computer. Just to make matters worse, researchers shortly thereafter identified at least two viruses that were designed to take advantage of holes created by the code for the rootkit. Scrambling to respond to the developing disaster, Sony BMG last week announced that it was recalling and replacing the 4.7 million discs containing the program and that it stopped using the controversial software.

Yesterday, Texas Attorney General Greg Abbott hammered the reeling music company with a civil complaint over the software that the company included on 52 of its recently released recordings. The lawsuit filed in Travis County (Austin) District Court alleges that Sony BMG's XCP software violates Texas' recently enacted antispyware law, the Consumer Protection Against Computer Spyware Act. Mr. Abbott called Sony BMG's software -- the purpose of which is to make it harder to copy compact discs -- "a direct violation, almost word for word," of the antispyware law, which provides for penalties of $100,000 per violation, or each computer on which a Sony BMG CD installed its software. The Chronicle article on the lawsuit is here, and Chronicle technology expert Dwight Silverman comments on Sony BMB's bungle and the resulting Texas lawsuit here.

Finally, just to put a punctuation mark on Sony BMG's very bad day, a third lawsuit seeking class-action status of claims relating to the copy-protection software was filed yesterday in Los Angeles.

Again, who made that decision to include that software on those CD's? ;^)

Posted by Tom at 6:00 AM | Comments (1) |

Attempting to pin down Atta in Prague

Edward Jay Epstein (previous post here) is the author of a new book on Hollywood, The Big Picture (Random House, 2005), and is in the process of writing a book on the 9/11 Commission. In this fascinating Opinion Journal piece, Mr. Epstein explains the maddening difficulties of tracking down the truth of whether 9/11 hijacker Mohamed Atta met with an Iraqi intelligence agent in Prague during April, 2001. Particularly interesting is the following excerpt, which describes Czech intelligence agent Jiri Ruzek's troubling experience in dealing with the American intelligence community:

On Sept. 11, Mohamed Atta's picture was shown on Czech television, and the next day the BIS's [the Czech intelligence agency] source in the Iraqi Embassy dropped a bombshell. He told his BIS case officer that he recognized Atta as the Arab who got in the car with [Iraqi intelligence agent] al-Ani on April 9. Mr. Ruzek immediately relayed the secret information to Washington through the CIA liaison. The FBI sent an interrogation team to Prague, which, after questioning and testing the source, concluded that there was a 70% likelihood that he was not intentionally lying and sincerely believed that he saw Atta with al-Ani. The issue remained whether he had mistaken someone who resembled Atta for the 9/11 hijacker. Meanwhile, records were found showing that Atta had applied for a Czech visa in Germany in 2000, and made at least one previous trip to Prague (from Bonn, by bus, on June 2, 2000, flying to Newark, N.J., the next day).

Less than a week after Mr. Ruzek shared the BIS's confidential information with American intelligence, it was leaked. The Associated Press reported, "A U.S. official, speaking on condition of anonymity, said the United States has received information from a foreign intelligence service that Mohamed Atta, a hijacker aboard one of the planes that slammed into the World Trade Center, met earlier this year in Europe with an Iraqi intelligence agent." CBS named al-Ani as the person meeting with Atta in Prague.

Mr. Ruzek was furious. He considered what he had passed on to the FBI to be unevaluated raw intelligence, and its disclosure not only risked compromising the BIS's penetration in the Iraqi Embassy but also greatly reduced the chances of confirming the intelligence in the first place.

Read the entire piece.

Posted by Tom at 5:22 AM | Comments (0) |

Spitzer drops another misguided prosecution

Following the decision to drop his dubious prosecution (or was that persecution) of Theodore Siphol in regard to alleged improper trading of mutual funds (here, here, here and here), New York Attorney General Eliot Spitzer dropped similar fraud and larceny charges against Paul Flynn, a former executive at Canadian Imperial Bank of Commerce who had been accused of aiding hedge funds in improper mutual-fund trading.

Interestingly, spokespersons in Mr. Spitzer's office defended the decision to drop the charges against Mr. Flynn on the grounds that his indictment on criminal charges was merely a small part of the better good -- i.e., the Lord of Regulation's campaign to overhaul the mutual fund industry and extract over $3 billion in fines, restitution and fee cuts from those evil capitalist roaders. Besides, nine of the 11 people facing criminal charges from Spitzer's office related to the improper trading had pleaded guilty, so that's a pretty good batting average. Don't need to get greedy in chocking up another one against Mr. Flynn.

H'mm. Sounds to me as if Mr. Spitzer is using the criminal justice system to extort settlements from companies and individual defendants through headline-grabbing threats of business destruction and prison time. Plus, the publicity from these public crusades is cheap advertising for the "Spitzer for Governor" campaign.

Isn't such conduct more deserving of a criminal investigation than many of the matters that Spitzer pursues?

By the way, this Peter Elkind puff piece in the current edition of Fortune magazine at least provides some interesting personal background on Mr. Spitzer. Mr. Elkind is a co-author of Smartest Guys in the Room about the Enron scandal. Hat tip to Adam Shpeen for the link to the Spitzer article.

Posted by Tom at 4:38 AM | Comments (0) |

November 21, 2005

A Big Ad

My two teenage boys recommended the link for this Carlton Draught (an Australian beer) commercial, I think because they want an easy link to it for their friends. Maybe the friends will read a few other posts while they here, so what the heck. Besides, the commercial is pretty darn impressive. Hat tip to Adrianne Truett for the link.

Posted by Tom at 6:24 PM | Comments (0) |

USA Today scoops the majors in analyzing the Enron Task Force's legacy case

Is it just me or does anyone else find it odd that this USA Today article is doing a better job of covering the prosecutorial abuse that is taking place in the Enron-related criminal cases than supposedly more thorough national newspapers such as The New York Times and The Wall Street Journal?

Following up on this post from over the weekend, the USA Today article notes the utterly absurd and abusive tactic of the Task Force in fingering about 100 unindicted co-conspirators in its legacy case against former key Enron executives Ken Lay, Jeff Skilling and Richard Causey. The transparent purpose of the tactic is twofold:

First, to suppress exculpatory testimony in favor of the defendants from the unindicted co-conspirators, all or whom have declined to testify under their Fifth Amendment privilege out of fear of being indicted; and

Second, to have the testimony of the Task Force's own witnesses about the alleged hearsay statements of the unindicted co-conspirators introduced into evidence as an exception to the hearsay rule. Not surprisingly, most of the Task Force's witnesses are "cooperating witnesses" -- i.e., former Enron executives who attempting to reduce their prison time by testifying against the defendants pursuant to plea bargains with the Task Force.

Of this tactic, the USA Today article notes the comments of Stanley Twardy, a former U.S. attorney who is now a defense lawyer in Connecticut, that "'extremely rare' for a case to have as many unindicted co-conspirators as [the Lay-Skilling-Causey] case does. It's unusual to have them at all outside of drug and Mafia cases."

As noted in this other post from over the weekend, the Task Force's tactic has already resulted in a grave injustice in the Nigerian Barge case, where four Merrill Lynch executives are now serving prison terms because large amounts of exculpatory testimony for the defendants never came into evidence at trial. To avoid the same injustice from occurring in the Lay-Skilling-Causey trial, Judge Sim Lake should give the Task Force a deadline in which to indict any of the unindicted co-conspirators against whom the Task Force has a viable case, and then grant immunity from prosecution for all of the remaining unindicted co-conspirators. Only with such key testimony will the jury be able to sort out the truth of the Task Force's allegations that the defendants engaged in criminal wrongdoing at Enron. Without such testimony, the jury will be deliberating on nothing more than the Task Force's fictional screenplay of the defendants' role in Enron's demise.

Posted by Tom at 6:00 AM | Comments (10) |

Repairing the MARS platform

This earlier post noted the extensive damage that Hurricane Katrina caused to the MARS floating production platform in the Gulf of Mexico, which generates about 220,000 barrels of oil and 220 million cubic feet of natural gas daily when operational. Following up on that story, this Tom Fowler/Chronicle article reports on the delicate repair operation that will be taking place this week on the MARS platform. Essentially, the process involves removing a damaged rig from the platform, but the damaged rig is so ensnared with other equipment on the platform that removing it could cause even more damage to the equipment on the platform. Another story on the repair operation from the Baton Rouge Advocate is here. It's this type of cost of doing business in the oil and gas industry that tends to get overlooked amidst the bright lights that shine on this grandstanding.

Posted by Tom at 5:19 AM | Comments (0) |

Disassembling the case against DeLay

This earlier post noted the weak nature of the indictment against former House Speaker Tom DeLay, although the Republican outrage over the indictment rings somewhat hollow. But following up on the thought about the dubious basis of the indictment, former chairman of the Federal Election Commission, Bradley A. Smith, does the best job that I have seen to date of disassembling the case against DeLay in this Wall Street Journal ($) op-ed:

To summarize, the theory against Mr. DeLay goes something like this: Corporations made legal contributions to TRMPAC; and then TRMPAC made a legal contribution of this soft money to the RNSEC, which, as required by federal law, kept the funds in a separate account. The RNSEC then used an account containing individual contributions (hard money) to make otherwise legal contributions to 42 candidates for state or local office in Texas, including seven who may have been specifically recommended to them by Mr. DeLay and others. Somehow this series of legal transactions constitutes money laundering.

Two questions result. First, is it "laundering" when the law specifically allows corporate contributions to be used for administrative costs, and a party or PAC uses individual contributions thereby freed up to make increased candidate contributions? Second, even if so, in light of the unprosecuted and public ubiquity of the practice, on both state and federal levels, is it consistent with basic due process to now charge Mr. DeLay and his associates with a crime for which the possible penalties include life imprisonment?

Read the entire piece, which does an excellent job of explaining how politicians from both major parties routinely took advantage of loopholes in state and federal campaign finance law to engage in precisely the same conduct for which DeLay now stands indicted. This is the flipside of the same coin that reflects the increasing criminalization of merely questionable business transactions in the post-Enron era, a trend that has already resulted in grave injustices and daunting prosecutorial misconduct. If litigation over such issues is justified at all, these matters are best left for civil cases, where responsibility for any wrongdoing can be sorted out among multiple parties, the prejudicial effect of such litigation on future beneficial risk-taking can be minimized, and citizens going about their jobs are not in fear that, but by the grace of God, the government is not turning its overwhelming prosecutorial power in their direction.

Posted by Tom at 4:23 AM | Comments (0) |

2005 Weekly local football review

Chiefs 45 Texans 17

After beating the spread in the past three games, the 1-9 Texans took a dive in front of a national television audience in the ESPN Sunday night game as their nightmare season continued. This one was over in the second quarter as the Chiefs sliced and diced the Texans defense to take a 24-7 lead before Texans QB David Carr iced it for the Chiefs by throwing an interception TD in the waning moments of the first half to give the Chiefs an insurmountable 31-7 lead. Although the Texans' defense was non-existent, Carr was particularly bad, as was star WR Andre Johnson, who looked like a petulant jerk for most the game. The Rams come in next week for their confidence-building session against the Texans, and then its off to Baltimore and Tennessee for back-to-back road games. My oh my, this is a really bad football team, every bit as awful as the horrifying Oilers teams of the Bill Peterson era. The Texans sure could use Sid Gillman and Mike Holovak.

Cowboys 20 Lions 7

The 7-3 Pokes continued their impressive mid-season run with a workmanlike victory over the Lions at Texas Stadium. I still have my doubts whether the Cowboys' mediocre offense can score enough points to win against the NFL elite teams, but there is no question that the Cowboys' defense is developing into a devastatingly fast and hard-hitting unit. By the way, the Lions were penalized an incredible 17 times for 130 yards in the game. Got that resume updated, Coach Mariucci?

SMU 29 Houston Cougars 24

The 5-5 Cougars maddening season continued as they blew a 14-10 halftime lead to the 4-6 Mustangs despite dominating the statistical battle. Inasmuch as the loss probably dealt a fatal blow to the Cougars' bowl hopes, the Cougars are ripe for an upset in their closing game against cross-town rival Rice in their final game on Saturday afternoon.

Central Florida 31 Rice 28

The 1-9 Owls almost pulled off the upset, but lost two fourth quarter leads in falling to one of C-USA's top teams. However, the performance should give the Owls confidence going into their season-ending game on Saturday against Houston, which looks like a prime candidate for an upset.

The Texas Longhorns and Texas Aggies were off this weekend in preparation for their annual rivalry game on Friday in College Station. The betting line in this one is currently Texas minus 26.5, which is the largest line in this game that I can recall. Even at that elevated level, I don't know of many Aggies placing money on their team.

Posted by Tom at 3:20 AM | Comments (6) |

November 20, 2005

Why I oppose the death penalty

I oppose the death penalty, but not on philosophical grounds. Rather, I do not believe that the state can implement the death penalty without making mistakes such as the one described in this haunting Sunday Houston Chronicle/Lise Olsen article. Until a system is developed that reduces as much as humanly possible the risk of mistakes such as this one from happening, I remain opposed to the death penalty.

By the way, we are not close to having such a system in place in Texas.

Posted by Tom at 9:23 AM | Comments (5) |

NY Times on the sad case of Dan Bayly

Landon Thomas, Jr. of the New York Times has written this major Sunday Times article about the sad case of Daniel Bayly, the former head of Merrill Lynch's global investment banking division who is presently serving a two and a half year prison sentence as a result of his conviction on corporate fraud charges in connection with the controversial Enron-related Nigerian Barge case. Although this blog's search engine will generate a large number of posts that refer to that case, an extensive analysis of the Nigerian Barge case can be found in a series of posts here, here and here.

Mr. Thomas' article is an excellent portrayal of the extraordinary personal damage that is resulting from the Justice Department's dubious criminalization of business in the post-Enron era. Mr. Thomas points out how that the implementation of that policy has moved beyond catching big fish such as Ivan Boesky or Bernard Ebbers and is now ensnaring relatively unknown business executives such as Mr. Bayly, who really had limited involvement in the underlying transaction involved in the Nigerian Barge case. Moreover, Mr. Thomas delves extensively into the troubling conduct of Merrill Lynch's management, which offered up Mr. Bayly and his three Merrill colleagues to the Justice Department as sacrifical lambs in an effort to avoid an indictment of the firm that might have prompted an Arthur Andersen-type meltdown. The disturbing nature of such corporate sacrificial lamb offerings has been a frequent topic on this blog.

Mr. Thomas' article is a refreshing change from the more common demonization of business executives that usually takes place in the mainstream media. However, beyond the scope of Mr. Thomas' piece is the distressing conduct of the Enron Task Force prosecutors in the Nigerian Barge case and the other Enron-related criminal cases. Regardless of what one thinks about the issue of whether the Nigerian Barge case should have been made into a criminal case in the first place, no reasonable analysis of the case can justify the Task Force's suppression of the truth during the trial of case.

In short, the Task Force took a reasonably complex finance transaction between Enron and Merrill Lynch and criminalized it through a brazen web of distortion, suppression of key testimony, inadmissible hearsay, opposition to the defense's jury instruction on the key issue in the case and prosecutorial misconduct. Rather than charging Mr. Bayly and his colleagues and then allowing the jury to sort through all relevant testimony and evidence in determining the truth, the Task Force presented to the jury a fictional screenplay of the underlying transaction and then effectively prevented Mr. Bayly and the other defendants from presenting the mountains of testimony and evidence that contradicted the Task Force's fictional account. To make matters worse, the Task Force is deploying precisely the same deplorable tactics in its legacy case against former key Enron executives Ken Lay, Jeff Skilling and Richard Causey.

Thus, despite the enormous personal tragedies that each of the families of the four Merrill Lynch executives involved in Nigerian Barge case are enduring, the even greater tragedy of this case is the damage done to our system of justice and the Rule of Law. For as Sir Thomas More reminds us, if we do not require the state to adhere to justice and the Rule of Law in even cases against the unpopular business executives of the moment, then "do you really think you could stand upright in the winds [of abusive state power] that would blow then?" The Enron Task Force's suppression of the truth in the Nigerian case is showing us precisely what happens when such ill winds blow, and the resulting emotional trauma that the Merrill Lynch executives and their families are experiencing cannot reasonably be dismissed as merely a trade-off of an imperfect system.

Posted by Tom at 6:12 AM | Comments (1) |

November 19, 2005

Is the Lord of Regulation also the Lord of Compensation?

Following on the theme from this earlier post, this Kimberly Strassel/Wall Street Journal ($) op-ed examines the deposition testimony that is emanating from New York Attorney General Eliot Spitzer's lawsuit to recover alleged overcompensation paid by the New York Stock Exchange to former NYSE CEO Richard Grasso in connection with Mr. Grasso's $140 million pay and retirement package. Ms. Strassel reports that the deposition testimony from the NYSE directors is contradicting Spitzer's theory of the case, which is that the directors were given incomplete information regarding Grasso's pay package and that they shirked their duty to evaluate the compensation arrangement fully. Noting Ms. Strassel's piece, Larry Ribstein points out the transparent nature of the legal issue and the political purpose of the Grasso lawsuit, and provides the following "money" observation:

Spitzer is attempting to collect the rent on this litigation for his gubernatorial campaign. . . .

An imponderable here is where Spitzer gets off second-guessing a compensation decision. Shouldn’t this be subject to the business judgment rule which, after all, gave the Disney board considerable coverage in the Ovitz affair? Well, the NYSE is a non-profit, and so gets Spitzer’s solicitous stewardship under an arguably stricter rule. But one wonders why the business judgment rule wouldn't apply here, since non-profits have to operate under the same conditions in hiring executives that the for-profits do, and courts aren't any better able to review compensation in a non-profit.

Posted by Tom at 12:04 PM | Comments (0) |

Fifth Circuit schedules return to New Orleans

The Fifth Circuit Court of Appeals, which relocated temporarily to Houston in the aftermath of Hurricane Katrina (earlier posts here and here), issued this press release yesterday in which it made public its plans for returning to New Orleans next month. The court will begin moving back Dec. 16 and will be closed until Jan. 8, during which time only emergency matters will be handled. The court originally had planned to move to Baton Rouge as an intermediate step before returning to its longtime home in New Orleans' John Minor Wisdom Court of Appeals Building. However, conditions in New Orleans are stable enough to allow the 135 employees of the Court to return home. The Court has been using makeshift work spaces in the Bob Casey U.S. Courthouse in downtown Houston over the past couple of months.

Posted by Tom at 9:43 AM | Comments (0) |

Lay-Skilling-Causey witness intimidation allegations scheduled for hearing

This Mary Flood/Chronicle article reports that U.S. District Judge Sim Lake has scheduled a hearing in the Enron Task Force's legacy case against former key Enron executives Ken Lay, Jeff Skilling and Richard Causey over the defendants' allegations that the Task Force has engaged in wide-ranging witness intimidation in an effort to suppress exculpatory testimony in favor of the defendants, whose criminal trial is scheduled to commence in less than two months.

Ms. Flood reports that Judge Lake has ordered two Houston criminal defense attorneys and four of their clients to testify in the hearing. The two attorneys are Bob Sussman and Wendell Odom, and one of the client that will be called is Larry Lawyer, a former mid-level Enron executive who previously pled guilty under a cooperation agreement to a tax-related charge arising from a payment that he received in connection with one of former Enron CFO Andy Fastow's infamous deals in which Fastow and several of his Enron associates enriched themselves.

The witness intimidation issue has been festering throughout both of the prior Enron-related criminal trials. It first arose in connection with the trial of the Nigerian Barge case in which the Task Force effectively suppressed exculpatory testimony for the defendants in that case by fingering as unindicted co-conspirators dozens of former Enron and Merrill Lynch executives who were involved in the transaction that was the basis of the prosecution. Every one of the unindicted co-conspirators declined to testify in the Nigerian Barge trial on the basis of their Fifth Amendment privilege against self-incrimination. Consequently, four Merrill Lynch executives are serving prison sentences without having had the opportunity to present substantial amounts of exculpatory testimony and related evidence to the jury.

Then, as noted in this earlier post, the witness intimidation issue boiled over in public during the trial of the Enron Broadband case when former Enron Broadband engineer Lawrence Ciscon dramatically testified that Enron Task Force prosecutors had repeatedly threatened him and had fingered him as a target of an indictment in attempting to dissuade him from testifying on behalf of the five Enron Broadband defendants. That dramatic testimony came on the heels of the Task Force eliciting false testimony from former Enron Broadband co-CEO Ken Rice during that trial, which was then followed by the Task Force threatening another witness in connection with her testimony regarding Rice's false testimony. As noted in this post, The Enron Broadband jury ultimately acquitted the defendants on some of the charges and could not reach a decision on the balance of the charges, resulting in re-trials of the defendants next year.

The Task Force then deployed the same tactic earlier in the Lay-Skilling-Causey case by taking the extraordinary step of naming 114 unindicted co-conspirators, which they have subsequently "reduced" to a number just under 100. That tactic -- coupled with the Task Force's control over the communications of any Enron-related defendant who has entered into a plea bargain with the Task Force -- has effectively prevented defense counsel for Lay, Skilling and Causey to develop exculpatory testimony on behalf the three men. The Task Force's control of plea bargainers' communications and its fingering of the unprecedented number of unindicted co-conspirators prompted prominent law professor Michael Tigarto comment in connection with the Lay-Skilling-Causey motion to dismiss that "this level of silence is not normal" from witnesses and that "I have never seen defendants in a major public trial, especially a white-collar trial, so completely ostracized by witnesses with pertinent information."

Finally, Ms. Flood also passes along that the Lay-Skilling-Causey defense team has informed the Fifth Circuit Court of Appeals that it should not jump to conclusions despite the pervasive presumption of guilt against all things related to Enron. In a letter to the Court, attorneys for Lay, Skilling and Causey asked the Fifth Circuit to delete a reference to Enron in its recent opinion reversing the long sentence in the sad case of Jamie Olis:

"It is the defendants' position, and they believe the evidence will show at their soon-to-begin criminal trial, that the books were not cooked at Enron, that its stock was not inflated through fraudulent means, and that the company's collapse was not caused by the alleged fraud."

Stay tuned, for this is shaping up to be a very interesting trial.

Posted by Tom at 7:15 AM | Comments (0) |

November 18, 2005

The judge said what?

New York Bankruptcy Judge Prudence Carter Beatty -- who is overseeing the Delta Airlines chapter 11 case -- is apparently somewhat of a live-wire on the bench. The airline pilots union has already asked her to recuse herself over remarks she made from the bench regarding the pilots' compensation, and this Wall Street Journal ($) article reports on several barbs that the judge has tossed from the bench during hearings in the Delta chapter 11 case, including the following:

Yesterday, when Delta's labor attorney asked the company's chief financial officer, on the witness stand, what Delta did when it found itself falling behind in meeting financial targets, the judge interjected, "They did what everyone else did: engage in creative accounting." Amid laughter, the judge continued, "It's what Enron did, what WorldCom did." The executive replied, "That's absolutely not the case."

Posted by Tom at 4:53 AM | Comments (2) |

Take this auditing job and shove it

So, how would you like being an auditor?

First, Arthur Andersen was prosecuted out of business by the Justice Department in an ill-advised prosecution.

Next, KPMG almost melted down in the face of a criminal investigation into its promotion of tax shelters, and still might not be out of the woods, yet.

Meanwhile, the other largest US accounting firms -- PriceWaterhouseCoopers, Deloitte Touche, Ernst & Young and Grant Thornton -- all have had problems of their own.

In such an intensely adverse environment, one can only speculate on how many of these firms have been propped up with the infusion of revenue that has been generated over the past couple of years from the gravy train of the Sarbones-Oxley legislation.

But even the benefits of Sarbones-Oxley are not without another swift kick in the rear. The Public Company Accounting Oversight Board -- created under Sarbones-Oxley "to oversee the auditors of public companies in order to protect the interests of investors" -- has been issuing inspection reports this year in which it has been evaluating the Big Four and other auditing firms' audits of several undisclosed publicly-traded companies.

In the PCAOB's most recent reports, PricewaterhouseCoopers and Ernst & Young were criticized for their audits of several public companies, and those findings come on the heels of similar reports earlier in the year in which the PCAOB levied similar criticism toward several public company audits of KPMG and Deloitte & Touche. The PCAOB used identical language as it used in the earlier reports in concluding that, in some cases, the audits it inspected at PricewaterhouseCoopers and Ernst were marked by deficiencies "of such significance that it appeared to the inspection team that the firm had not, at the time it issued its audit report, obtained sufficient competent evidential matter to support its opinion on the issuer's financial statements."

And just for good measure, the PCOAB also issued its inspection report on BDO Seidman LLP, one of the larger US accounting firms outside of the Big Four. The conclusion? The same as for the other firms.

Swallowing hard, PricewaterhouseCoopers responded publicly by stating that the firm took the PCAOB's findings "seriously" and "will incorporate these findings into our ongoing audit quality-improvement efforts." Similarly, Ernst announced that the PCAOB's inspections "assist us in identifying areas where we can continue to improve our performance." In chorus, BDO also announced that it takes the findings seriously and that "we are committed to improving our performance wherever possible."

In the meantime, plaintiffs' lawyers are busily taking note of the PCOAB's inspection reports and the firms' sheepish replies.

Does anyone else get the impression that a career in auditing is a tough sell these days?

Posted by Tom at 4:05 AM | Comments (2) |

The Lords of Regulation go after Lord Black

Fraud trials have come a long ways in Chicago since the days of Al Capone as federal prosecutors in the Windy City announced the indictment on Thursday of newspaper entrepreneur Conrad Black and three of his former associates in connection with an alleged fraud scheme that took place while Mr. Black controlled the giant newspaper company, Hollinger International Inc. Charged along with Mr. Black were Jack Boultbee and Peter Atkinson, who were both former vice presidents of Hollinger, Mark Kipnis, the company's former corporate counsel, and Ravelston Corp., a Canadian company that Mr. Black used to gain control of Hollinger. Mr. Kipnis was charged with fraud in August along with former Hollinger chief operating officer David Radler, who has already copped a plea under which he will serve 2.5 years in the pokey in return for cooperating with prosecutors. The Justice Department's unusually long press release on the indictment is here.

The indictment contends that the fruits of the fraud were a couple of Park Avenue apartments, a corporate jet, a trip to the South Pacific and over $50 million in allegedly unauthorized payments to executives. Mr. Black and the others are accused of diverting more than $32 million from Hollinger through a byzantine series of transactions that the indictment frankly does not describe well. The indictment also alleges that Mr. Black was involved in the fraudulent diversion of an additional $51.8 million in 2000 from Hollinger's sale of assets to CanWestGlobal Communications Corp.

Although the indictment is an unwieldly 60 pages, it is at least narrower than the internal Hollinger probe of last year, which concluded that Mr. Black and the others diverted more than $400 million from the company. After that report, the Securities and Exchange Commission filed civil fraud charges against Mr. Black and Mr. Radler regarding $85 million that they allegedly diverted from the company.

Mr. Black was ousted in a shareholder revolt a couple of years ago as chairman and CEO of Hollinger, which is a newspaper publishing company that at one time owned, among other interests, hundreds of North American community newspapers, London's Telegraph Group, the Jerusalem Post and the Chicago Sun-Times. After Mr. Black's ouster, a Hollinger board committee report concluded that Mr. Black and and others had taken $32 million in payments that the board had not authorized, which spawned numerous civil lawsuits and the SEC lawsuit. Inasmuch as discovery in certain of the cases has indicated that Hollinger's board actually approved a substantial amount of the payments that the plaintiffs contend were improperly diverted by Mr. Black, Mr. Black's defense in the criminal case is likely to be that most, if not all, of the payments were approved by the Hollinger board, and that receiving the benefits of generous (or sloppy, depending upon your point of view) corporate governance is not a criminal act.

Posted by Tom at 4:00 AM | Comments (0) |

November 17, 2005

SEC shoe drops on former Patterson-UTI CFO

Following on the revelations of late last week, the Securities and Exchange Commission commenced a civil action yesterday to freeze the assets of former Patterson-UTI Energy, Inc. chief financial officer, Jonathan Dwane "Jody" Nelson, who the SEC accuses of masterminding the embezzlement of $70 million from the Snyder, Texas-based contract drilling company (a copy of the complaint is here. In addition to the freeze order, the SEC obtained the appointment of a temporary receiver over Mr. Nelson's assets. The SEC's press release on the lawsuit provides more information regarding the alleged scheme than has been made public to date:

In its emergency lawsuit, the SEC alleged that Nelson, who resides in Dallas, Texas, orchestrated a massive phony-invoice scheme to embezzle more than $69 million from Patterson-UTI over five years. The SEC also named as relief defendants five Nelson-controlled companies alleged to have received proceeds from the scheme: XIT Land & Energy, Inc. ("XIT"), Chisum Travel Center, Ltd., Z8 Properties, Ltd., Three Stars Aviation, LLC, and Chisum Coach, Ltd.

The SEC's complaint alleges that Nelson created false invoices that caused Patterson-UTI to pay millions of dollars to XIT, a company he secretly controlled that was not a legitimate Patterson-UTI vendor. To accomplish his scheme, Nelson circumvented Patterson-UTI internal controls by, among other things, forging another company official's initials on payment documents. According to the complaint, Nelson finally confessed to Patterson-UTI on November 9 that he embezzled approximately $29 million, but company records show that he actually stole $69,434,342 from January 2001 through October 2005. To hide his scheme, Nelson, among other things, made false written representations to Patterson-UTI's independent auditor about the accuracy of the company's financial statements and signed false public certifications attesting to the truthfulness of the company's quarterly and annual SEC reports.

As the complaint alleges, Nelson transferred the embezzled funds from an XIT bank account to other entities he controlled, including Chisum Travel, Z8 Properties, Three Stars Aviation and Chisum Coach. The SEC contends that Nelson used these funds to purchase an airplane, an airfield, a cattle ranch, homes, vehicles and a full-service truck stop, among other things. The SEC named XIT and these other entities as relief defendants solely to secure equitable relief to prevent them from dissipating or hiding the fruits of Nelson's wrongdoing.

As Peter Henning notes, the SEC lawsuit is an almost certain precursor of a criminal indictment of Nelson, who may attempt to implicate others in the scheme as a bargaining chip over the length of his prison sentence. Stay tuned.

Posted by Tom at 6:42 AM | Comments (0) |

Cleveland businessman who bribed Brown Administration officials gets 15 years

The Chronicle's Dan Feldstein has been doing a good job over the past couple of years of keeping track of the federal corruption investigation that has been going on in Houston and Cleveland, Ohio. In this article from today's Chronicle, Mr. Feldstein reports that Nate Gray, the Cleveland businessman who was convicted earlier this year of bribing two former City of Houston officials from the administration of former Houston Mayor Lee Brown, was sentenced yesterday to 15 years in prison and ordered to pay $1.5 million to the Internal Revenue Service. Mr. Feldstein also notes that testimony of an FBI agent during the Gray trial indicates that the corruption probe involving former Brown Administration officials is continuing in Houston.

The two former Brown Administration officials who took the bribes from Gray -- chief of staff Oliver Spellman and building services director Monique McGilbra -- previously copped pleas in agreeing to testify against Gray and were sentenced to far lesser sentences earlier this year. The Justice Department news release on the Gray sentencing and the corruption probe is here, and the previous posts on this bribery scandal are here.

Posted by Tom at 5:35 AM | Comments (0) |

"Coach, did you see that guy's tattoo?'

Do you recall me telling you that some folks in Texas take high school football very seriously? In the "you can't make this stuff up" category, the following is from this article in today's Chronicle:

Bigger. Faster. Better beards.

Looking back now, it should have been obvious that something was amiss about the adult football team that Texas Christian School fielded three weeks ago in Austin.

Not to mention the tattoos.

"Some of the guys had tattoos and full beards and looked like they were like 25," Not Your Ordinary School senior running back David Johnson said of his opponents that Oct. 28 afternoon. "At the time, we thought they were just sort of big.

"Now we see why they looked so old."

It turns out Johnson and his team unwittingly played a six-man team made up of college-age players, coached by Texas Christian [High School]'s Herc Palmquist. The Texas Christian varsity team was told the game had been canceled and they had the night off.

Instead, Palmquist brought eight college-age players to play what he called a "pickup game," which NYOS won 28-18.

Now, Palmquist is serving a five-game suspension leveled by the Texas Association of Private and Parochial Schools, which governs Texas Christian athletics.

Read the entire article. If Coach Palmquist gets canned over this, perhaps he could scout for the Texans? On the other hand, given that Texas Christian lost the game even while using college-age players, maybe not.

Posted by Tom at 5:14 AM | Comments (5) |

Checking in on GM's Enronesque experience

Following up on posts here and here from last week, General Motors' seemingly relentless descent into a formal reorganization under chapter 11 continued yesterday as its share price fell to its lowest closing since December, 1991. Previous posts on GM's developing problems are here.

Probably the best indication of the risk of a GM bankruptcy is in the credit markets. Over the past week, the price of a GM bond maturing in 2033 has fallen about four points (i.e., about $40 per $1,000 face value) to yield 12.9%. On the other hand, the price of protection against a GM default in the market for credit derivatives is increasingly expensive. As of yesterday, the price of protection -- essentially insurance against a default -- on $10 million in GM bonds had risen to above $2 million up front plus $500,000 per year. That compares with a $1.6 million up front payment for such price protection just last week.

Interestingly, GM remains reasonably liquid, with around $19 billion in cash or other cash equivalents, and that liquidity is often touted by the company in media releases as proof that it is not contemplating a bankruptcy case. However, as folks who are familiar with reorganizations know, a company that needs to go through a chapter 11 case is far better advised to do so when it is flush with cash than to wait until its cash reserves have been depleted. A company in need of a reorganization never should wait until it can't afford to go bankrupt.

Posted by Tom at 4:18 AM | Comments (0) |

November 16, 2005

What half a million bucks buys you

The house on the left above is an example of what half a million bucks will buy you in the Village of Alden Bridge, a nice area of The Woodlands in suburban north Houston -- a 3,600 square foot decorator's home on a big, tree-filled lot, flagstone covered patio, 4 bedrooms, 4 bathrooms, gameroom, media, 2 staircases, dynamic kitchen, and a paneled study.

The house on the right is an example of what half a million bucks will buy you in Los Angeles -- a 1,200 square foot, two-bedroom Craftsman-style house with a "sizable" frontyard in a neighborhood that is "on its way up."

Read more about the crazy Southern California real estate market here. Hat tip to Craig Newmark for the link to the LA Times article.

Posted by Tom at 7:34 AM | Comments (4) |

Examining the train wreck that is the Texans

Recent posts here, here and here have noted the lack of research and insight in recent articles by Chronicle NFL beat writer John McClain and columnist Richard Justice on the subject of the woeful Houston Texans. Into that vacuum of analysis, Chronicle sportswriter John Lopez stepped up with this excellent column on the questionable personnel moves of Texans' General Manager Charlie Casserly, and he follows up on that effort with this interesting column today in which he questions Texans head coach Dom Capers' management of the team's coaching staff.

Regardless of whether you agree with Lopez's views, his last two columns on the Texans contain the type of research and analysis that provides the reader with a grounded position to think about in evaluating the Texans' surprising downturn this season. That's far more satisfying than off-the-cuff observations that have little or no factual basis and sound more like water cooler banter than the insightful analysis that readers really want with regard to the Texans' baffling situation that few people predicted (Clear Thinkers reader Don Mynack excepted) before the season.

Posted by Tom at 6:30 AM | Comments (2) |

The troubling case of the NatWest Three

The NatWest Three are the three former National Westminster Bank PLC bankers based in London -- David Bermingham, Giles Darby and Gary Mulgrew -- who are charged in Houston with bilking their former employer of $7.3 million in one of the schemes allegedly engineered by former Enron CFO Andrew Fastow and his right hand man, Michael Kopper (previous posts are here).

However, NatWest never sought to recover the funds from the three men, never pursued criminal charges against them in England, and neither the Crown Prosecution Service, the Financial Services Authority nor the Serious Fraud Office in the UK found sufficient evidence to prosecute. If a trial had taken place in the UK, then the three men could not be extradited to the US because of the principle of double jeopardy. But since no British trial has taken place, the British Home Secretary has granted the US extradition request under the Extradition Act of 2003, which was passed to facilitate extradition of suspected terrorists to the US. Under that legislation, the Home Secretary can extradite British citizens without the US authorities having to make a prima facie case -- they need only set forth a statement of the facts that they hope to prove. To make matters even murkier, the Extradition Act is a one-way street -- to extradite an American citizen from the US, the British still need to provide evidence that the American citizen has committed an extraditable offense.

Well, the three bankers are continuing to fight extradition to the United States to face the charges by seeking a judicial review of the Serious Fraud Office's decision not to investigate them in the UK for the alleged fraud. In that connection, this Times Online article raises the troubling prosecutorial conduct that has been involved in the NatWest Three case:

It seems unlikely that the FBI has incriminating evidence that has never been seen by the British authorities, although it is possible, as Mr Kopper and other former Enron executives have been busy shopping colleagues in return for shorter sentences. If there is no extra evidence, extradition looks unfair. If there is additional evidence, the British Government should surely request it, in order to decide whether to bring charges here.

One of the worst aspects of the case is the way that it has been used to stoke anti-Americanism. America has been portrayed as a wild frontier with no respect for due process. It is not. But British law has created a strange version of justice, a one-way street. A reciprocal treaty should be reciprocal. Right or wrong, the case of the NatWest three suggests that justice is not being seen to be done.

Just another example of how prosecutorial misconduct has become de jure in the Enron-related cases because of the pervasive perception of guilt that the prosecution and mainstream media have promoted to the public in those cases.

Posted by Tom at 5:26 AM | Comments (1) |

Charged with a crime in California? Just settle

Two California doctors who were charged with criminal fraud in performing unnecessary heart surgeries at a hospital formerly owned by Tenet Healthcare Corp. have agreed to an unusual settlement that resolves the criminal charges and includes a settlement of related civil litigation that provides $32.5 million in payments to patients and federal insurance programs. The investigation included a highly publicized raid of the hospital, which Tenet eventually sold under the threat of losing access to the Medicare program.

As a part of the unusual deal, the doctors who were charged agreed to pay $1.4 million each and consented never to perform any cardiology procedures or surgeries on any patient covered by various government insurance programs, including Medicare. Nevertheless, neither of the docs admitted liability and one of them commented that the reason he settled was that he could not "continue to fight a system that is not interested in the truth."

Posted by Tom at 5:02 AM | Comments (0) |

November 15, 2005

Settled again, with an assist from Dow Jones

Last time we checked in with University of Texas at El Paso head football coach Mike Price, the former University of Alabama head coach (for about five minutes) was settling his $20 million libel lawsuit against Time, Inc.

Well, as you might have heard, Time backed off of that settlement a few days after its announcement. Time contended indignantly that Coach Price and his attorney had breached the settlement agreement by making public comments about the settlement and the litigation. Coach Price and his lawyer denied that any of their statements breached the agreement, Time went ahead and filed a motion with the Alabama state court requesting that the settlement be set aside, anyway.

Enter Dow Jones, Inc., venerable publisher of The Wall Street Journal. Dow Jones filed a motion with the court in the Price v. Time lawsuit requesting that the court unseal the terms of the defunct settlement and other records in the case, which included information regarding the identity of Time's sources for what went on in Coach Price's hotel room that summer evening in Pensacola. Time apparently said "Oops!" and promptly opposed Dow Jones' request.

Regaining its senses, Time announced today that it had once again settled with Coach Price, which apparently moots the Dow Jones motion in the court's view. This time, Coach Price and his attorney could not be reached for comment on the settlement, thank goodness.

However, Coach Price has arranged for a several sideline passes to UTEP's next game to be held at the will-call window for Dow Jones. ;^)

Posted by Tom at 3:56 PM | Comments (0) |

J&J and Guidant settle

Johnson & Johnson and Guidant Corp. announced a revised acquisition deal this morning that values Guidant at $21.5 billion, about $4 billion lower than the original price, and settles the companies' lawsuit over J&J's decision to walk away from the previous deal because of a material adverse effect on Guidant's financial condition.

No word yet on how much of that $4 billion will make it into the "Spitzer for Governor" campaign war chest. ;^)

Posted by Tom at 6:49 AM | Comments (0) |

The best defense is a good offense

Thomas H. Lee Partners, Ltd is the private equity firm that bought a big stake in Refco, Inc. last year and held a 38% equity stake in the company after Refco went public in August of this year. With Refco's recent descent into bankruptcy, that equity stake is now worthless.

Notwithstanding that rather disappointing investment, Thomas H. Lee Partners is a defendant along with former Refco CEO Phillip Bennett and several other Refco executives and consulting firms in several civil lawsuits by investors seeking substantial damages that have been filed since the revelations about Mr. Bennett's short-term lending arrangement between Refco and one of his personal investment companies. More lawsuits over its involvement with Refco and Mr. Bennett are almost a certainly for Thomas H. Lee Partners.

So, having made this stupendously bad investment and getting sued out the gazoo to boot, what should Thomas H Lee Partners do to defend itself? Well, how about go on the offensive?

By the way, in lining up other prospective defendants in Refco-related civil litigation, it was noted earlier that Grant Thornton was Refco's auditor and that law firm Mayer, Brown advised a third party that was involved in the lending arrangement with Refco. The Thomas H Lee Partners lawsuit reveals some additional defendant prospects:

Over more than 10 months, Lee executives spent more than $10 million employing a number of firms - including the accounting firm KPMG and the law firm Weil, Gotshal & Manges - to evaluate Refco before it invested.

The private equity firm also hired the consulting firm McKinsey & Company to conduct customer surveys and to assess growth in the futures business; the insurance broker Marsh & McLennan to study risk management and the adequacy of insurance; Mercer Human Resource Consulting to look at human resource issues; and a private investigative firm to do background checks on Mr. Bennett and some of the company's other top officials.

Thomas Lee executives also worked closely with a number of leading investment banks, including J. P. Morgan Chase, HSBC, Harris Bank and Goldman Sachs, all of whom had lent Refco money in the past, according to the suit, and Credit Suisse First Boston which represented Lee Partners in its acquisition of Refco. Goldman Sachs and Credit Suisse First Boston underwrote the company's 2005 initial public offering.

Is there any mess in which KPMG is not involved these days?

Posted by Tom at 5:38 AM | Comments (6) |

Life after Hank

Couldn't help but notice that American International Group Inc. announced yesterday that its third-quarter net income fell 36% to $1.72 billion (65 cents a share) as a result of recent large catastrophe losses. This comes on the heels of the announcement from last week that AIG would restate its results dating to 2002 to correct errors in the way it accounted for certain types of derivatives contracts, which restatement came only six months after AIG had completed an earlier restatement for the same periods. Just to make matters as murky as possible, AIG also also announced yesterday that it had revised its results for 2000 and 2001.

Inasmuch as yesterday's earnings announcements were in line with forecasts and came after the close of trading, they did not have much of an impact on trading. AIG's shares increased 26 cents to $67.50 in regular trading yesterday and, in after-hours trading, the shares dropped 30 cents to $67.20. The stock hit a 52-week low of $49.91 this past spring during the period in which the company restated five years of results and cut shareholder's equity by $2.26 billion as New York AG Eliot Spitzer sparred with former AIG CEO, Maurice "Hank" Greenberg. For the first nine months of this year, AIG's profits were $10.02 billion ($3.82 a share), which is up from its restated (twice) profit of $8.3 billion ($3.14 a share) for the first nine months of 2004.

Meanwhile, AIG also announced that a group of its unidentified current and former employees had received Wells notices from the Securities and Exchange Commission, which is a formal notice that the SEC has made the preliminary decision to bring enforcement actions against the current and former employees in connection with the agency's investigation into AIG's accounting practices. A Wells notice gives prospective defendants an opportunity to respond directly to the SEC's administrators regarding the SEC staff's findings before the staff makes formal recommendations to the administrators on whether the agency should pursue civil regulatory actions against the defendants.

Welcome to life after Hank Greenberg, AIG investors. Tread carefully, because this type of uncertainty will be the norm for AIG for quite some time.

Posted by Tom at 4:28 AM | Comments (0) |

November 14, 2005

The Rumsfeld Reorganization

Don't miss this important David Von Drehle/Washington Post article that provides a decent overview of the reorganization of the Defense Department under Secretary of Defense Donald Rumsfeld during preparations for the Iraq War. This is an important issue that has been festering since the Reagan Administration and has major domestic and foreign policy implications (previous posts on the issue are here). However, the issue tends to fly somewhat beneath the radar screen for various reasons, not the least of which is the depth of the issue and the overshadowing effect of related issues, such as detainee policy.

Into this mini-vacuum of analysis, Mr. Von Drehle does a good job of framing the issue:

Diving in, he found his marching orders in a speech given by candidate Bush at the Citadel in 1999, calling for a "transformation" of the great but lumbering U.S. military. The Cold War force was built around big foreign bases and heavy weapons "platforms," such as tank columns and aircraft carriers. With the Cold War over, Bush said, America should use the chance to "skip a generation" of weaponry and tactics to seize the future of warfare ahead of everyone else. A transformed military would be lightly armored, rapidly deployable, invisible to radar, guided by satellites. It would fight with Special Operations troops and futuristic "systems" of weaponry, robots alongside soldiers, all linked by computers. This force would be unmatchable in combat, Bush predicted, but it should not be used for the sort of "nation-building" that characterized Pentagon deployments to Haiti and the Balkans under Clinton.

Little of this was entirely new. Since Vietnam, Pentagon leaders -- including the younger Rumsfeld -- had been searching for more efficient, less entangling, ways to project U.S. power. Even the Army, perhaps the most hidebound of the services, had begun a complete reorganization to make itself easier to deploy. "Some things had been done since the end of the Cold War," Rumsfeld conceded in the interview.

But the Pentagon is the world's biggest, richest bureaucracy, with an annual budget larger than the entire economies of all but about a dozen nations -- bigger than Switzerland or Sweden. The leviathan managed to shrug off most deep and lasting changes. Thus, when Rumsfeld took office in 2001, he recalled, "we were located pretty much where we had been located, geographically, around the world. We still had the same processes and systems and approaches."

Some of the most important changes on Rumsfeld's menu were also the toughest, because of the entrenched interests involved. Weapons programs and bases provide jobs in nearly every congressional district. Republican or Democrat doesn't matter when it comes time to protect those jobs, so the programs and the bases endure even after the strategy behind them has expired. Some defense secretaries quail before this status quo, but not Rumsfeld. Shortly after taking office, he began questioning continued funding for the Crusader supercannon, an artillery piece designed to destroy Soviet tank columns that no longer existed, and the Comanche helicopter, another Cold War relic. Such efforts made him a hero in the military think tanks but earned him a lot of enemies on the Hill. By late summer 2001, Washington was buzzing with rumors that Rumsfeld would soon resign.

Then came September 11.

Read the entire article, which Mr. Von Drehle will be discussing today on washingtonpost.com/liveonline at noon, Houston time.

The Pentagon is a notoriously tradition-bound organization where new ideas that do not come through the normal chain of command are viewed by Pentagon generals with skepticism. Nevertheless, over the past 25 years, the Pentagon has increasingly embraced intellectual ideas from non-conventional sources. For example, Andrew Marshall in the late 1970's and early 80's argued from an obscure Pentagon office that wars could be revolutionized by precision bombs, unmanned planes and wireless communications that would allow the American military to destroy enemies from a distance. Similarly, the work of the late Pentagon iconoclast John Boyd and his acolytes in revolutioning the way in which the American military approaches war in the late 20th and early 21st century has been well-chronicled in Robert Coram's book, Boyd: The Fighter Pilot Who Changed the Art of War (Little, Brown 2002).

Consequently, it is important to remember that things are not always as they seem on the surface in regard to the American military. For example, the Pentagon brass often fought tooth and nail against the innovative ideas of people such as Boyd, Marshall, and now Rumsfeld, primarily because their ideas often ran contrary to the sacred cow military appropriations that the Pentagon hierarchy aggressively protect. On the other hand, you will not learn from the superficial media accounts that it took leaders such as Donald Rumsfeld, Dick Cheney, and Colin Powell over the past two decades to open up and accept recommendations from lower Pentagon sources such as Boyd and Marshall that have revolutionized and dramatically improved America's ability to conduct war in places such as Afghanistan and Iraq. But for the willingness of leaders such as Messrs. Rumsfeld, Cheney and Powell to listen to these unconventional sources of information, the traditional Pentagon brass would have squelched those innovative ideas before they would have ever seen the light of day.

For an interesting discussion of the WaPo article and these issues, check out this Gregory Djerejian post and related comments over at The Belgravia Dispatch. For another interesting strategic view of Rumsfeld's conduct of the war against Islamic fascism, check out this TigerHawk post.

Posted by Tom at 7:22 AM | Comments (2) |

Richard Justice said what?

Chronicle sportswriter Richard Justice says some of the darndest things. Take the following quotes from today's column on the current state of the hapless Houston Texans:

"The Texans are respectable. They're coming close. They've got four 2-7 teams left on their schedule. They almost won in Jacksonville, and they made a run at the Indianapolis Colts before losing 31-17 Sunday."

The Texans are respectable? In nine games this season, the Texans have been in only three games that they had a reasonable chance to win, albeit two of those have been in the last three games. As for making "a run" against the Colts, when the Texans closed to 21-14 in the third quarter, Peyton Manning and the Colts offense reeled off a five play, 75 yard march for a touchdown that made the Texans defense look as if it would have a difficult time stopping a hard-chargin' marching band. If that's respectable, then I would hate to see what Justice considers just plain bad.

"The Texans are a better offensive team since [offensive coordinator Joe] Pendry took over [for the fired Chris Palmer]. David Carr looks like he's on his way to becoming a first-rate quarterback. He's quicker and more accurate in his throws, less likely to take a sack."

H'mm. The Texans are a better offensive team since Pendry took over? The Texans are averaging 215.9 yards per game, which is 31st among the 32 NFL teams, and 13.9 points per game, which is 30th. Last season under Offensive Coordinator Palmer, pretty much the same Texans offensive personnel generated 320.5 yards per game (19th in the league) and 19.3 points per game (21st in the league). Meanwhile, last season, Carr was sacked a total of 49 times during the entire 16 game season, while he has already been sacked 46 times this season in only nine games, 33 of which have been while Pendry has been offensive coordinator. At the same time, Carr continues to have passes batted down at the line of scrimmage due to his sidearm delivery, gets flushed easily from the pocket, and continues to be poor at picking up secondary receivers. That's improvement?

"McNair has made mistakes, too. After spending more than $700 million on the franchise, he gave Capers a limited budget to hire a coaching staff."

Justice has been floating this theory in several of his recent columns, but he has not done any analysis of how the Texans' assistant coaching salaries stack up against the salaries of other NFL staffs. Without such an objective analysis, this criticism looks like Justice is passing along the sour grapes of either the head coach or the general manager.

Just what is the deal with Chronicle sportswriters shooting from the hip?

Posted by Tom at 6:07 AM | Comments (0) |

Rationalizing a bad system

Being independent politically, I tend to look for political issues where the right position is so clear that advocacy of the opposing view is an indication of a politician who is interested in something other than improving government. This Chronicle article addresses one such issue -- Texas' utterly unsupportable system of electing judges. This earlier Daily Texan article does the same.

Texas' system of judicial elections is, at best, not a good way to choose judges and, at its worst, a corrupt one. Along with former Texas Attorney General and state Supreme Court Justice John Hill, former state Supreme Court Justice Tom Phillips and many others, I have been supporting for over 20 years a new system for appointing judges in the Texas state courts similar to the appointment process that is used in the federal judicial system. This is not to say that the system in which federal judges is selected is perfect and does not generate a bad judge from time to time. But the risk of a bad judge reaching the bench in the federal system is far less than it currently is under the Texas system of judicial selection.

Although a growing number of Texans agree that elections are not the best way to choose judges, the tendency in Texas politics is for the party in control of the statehouse to support the current system because most of the elected judges are from that party. Inasmuch as the Republicans are now solidly in control of Texas state government, the GOP state leaders are in no hurry to change even a flawed system so long as it produces judges mainly from their party.

That is unfortunate. Virtually no Texas citizen knows all of the best candidates for the various judicial positions. For example, even though I have an active civil trial practice in both Harris and Montgomery Counties, I rely on the opinions of friends who practice criminal law to advise me regarding the best candidates for the criminal judgeships because I do not practice much in the criminal courts. Moreover, most lawyers are not trial lawyers, so even they have no or little experience on which to base an informed judgment about the best judicial candidates. Generally, lay people do not have the foggiest notion of who to select in Texas judicial races. Most folks simply look for a familiar name or two, sigh, and just make the best guess possible under the circumstances. Not exactly a sterling example of democracy at work.

Finally -- and perhaps most telling -- few of the best state court judges in Texas support the system. Few, if any, of the good judges enjoy the tedious and unbecoming process of soliciting campaign funds from the lawyers and law firms who practice in their courts. Moreover, the bad judges often favor attorneys who contribute to their campaigns and build huge campaign war chests that creates a disincentive for any good challenger to mount a campaign. Finally, as we have seen during the recusal motions in the Tom DeLay prosecution, the political affiliations of the judges often undermines not only the efficient administration of justice, but the public's perception of the integrity of the judicial system altogether.

Thus, this is one of those issues where -- regardless of your political affiliation -- the right answer is clear. Only a politician who is more interested in maintaining power than in improving the administration of justice would support the current flawed system. In that connection, please take note from the Chronicle article the position of Texas Governor Rick Perry regarding the issue -- he supports the current system.

Posted by Tom at 5:09 AM | Comments (4) |

November 13, 2005

2005 Weekly local football review

Rice 42 Tulane 34

The Owls (1-8) get the top spot on the local football review this week as they finally broke their 14 game losing streak (the longest in major college football) in beating Tulane at Rice Stadium. The win was a relief for the Rice program, which could attract a "crowd" of less than 10,000 for homecoming on a mild Texas autumn afternoon. Rumors continue to swirl that this will be head coach Ken Hatfield's last season, and -- despite the problems that the program has endured over the past two seasons -- he is going to be a tough act to replace. While Rice's new affiliation with Conference USA renews its traditional rivalries with Houston, SMU, and Tulane, it's reasonably clear that those rivalries will not be enough to revive the lagging Owl football program. The Owls have a tough game next Saturday at Central Florida before ending the season on the Saturday after Thanksgiving against Houston.

Colts 31 Texans 17

Let's see now. Total yards: Colts 420; Texans 210. Score with 9.5 minutes to go in the 2nd quarter: Colts 21 Texans 0. But for a couple of muffed punts by the Colts, this one would have been even uglier, which is a daunting thought. Meanwhile, the Texans' offensive line -- already the worst in the NFL -- has lost three regular players due to injury, which will probably prompt Coach Dom Capers to rearrange the deck chairs on this version of the Titanic once again (he has already done it a couple of times, described here and here). The Texans (1-8) -- which increasingly resemble those perfectly awful early 1970's Oilers teams -- now have home games the next two Sundays against the Chiefs and the Rams, both of which are likely to lace the Texans' porous defense in the same manner as the Colts did.

Texas Longhorns 66 Kansas 14

Key tip to Kansas head coach Mark Mangino -- don't declare in a post-game press conference that a close Texas victory over your team (last season's, as a matter of fact) is the result of referees throwing the game so that the Longhorns will be eligible for a BCS bowl game. Vince Young might hear about it. After leading this one 28-0 after the first quarter and 52-0 at halftime, the Horns (10-0) now get to rest for their rivalry game with the Aggies in College Station the day after Thanksgiving and the Big 12 Championship game the following Saturday at Reliant Stadium against probably Colorado. If the Horns take care of business in those two games, the Rose Bowl matchup with Southern Cal shapes up to be the most important game for the Texas football program since the classic 1969 "Game of the Century" victory over Arkansas that prompted President Nixon to declare the Horns national champions.

Oklahoma 36 Texas Aggies 30

The 5-5 Aggies are now falling back on moral victories, as they beat the spread for only the third time this season in this one, a sure sign of unfulfilled expectations. After getting blown out 28-7 in the first quarter of this game, the Aggies battled back and made a game of it, only to blow the opportunity to win the game by giving up a 3rd and long pass play with a little over two minutes to go after backing up the Sooners deep in their own part of the field. To make matters worse for the Aggies, QB Reggie McNeal endured what looked like a seriously sprained ankle, so he is questionable at best for the Texas game on the Friday after Thanksgiving. My sense is that the Aggies will get hammered by at least 30 by Texas, which will leave the Aggie faithful a long time before next season to grouse about Coach Fran and the $10 million buyout under his contract. Oh well, although not a national power anymore in football, the Ags are a winner in at least one fall sport.

Houston Cougars 27 Southern Miss 24

The 5-4 Coogs continue to irritate and amaze simultaneously. Although they dominated the line of scrimmage and the statistical battle, the Cougars fell behind 10-0 in this one before coming back to take 20-10 and 27-17 leads in the 4th quarter. Then, the always exciting hometown team coughed up two of their three fumbles -- including a fumble and a flubbed onside kick in the final 2:40 of the game -- to give Southern Miss an opportunity to pull the game out until the very end. Nevertheless, with wins in home games against SMU and Rice in their final two games, the Cougars will be 7-4 and a rather attractive team for a minor bowl game. You gotta love college football.

The Cowboys play the Eagles in the Monday Night game this week before playing Detroit the following Sunday and Denver on Thanksgiving Day. This is the key stretch of the season for the Pokes, who could take control of their division over the next 11 days.

Posted by Tom at 6:51 PM | Comments (5) |

November 12, 2005

NYT versus WaPo on the Windfall Profits Tax

A couple of days ago, this NY Times editorial dusted off about every archaic economic theory of the Carter Administration to promote a windfall profits tax on energy companies. So, I was thinking about doing an Econ 101 post pointing out how the Times' position would actually make things much worse than they already are, which is really not all that bad (have you noticed what's been happening to the price of oil and natural gas over the past week or so?).

Then, somewhat surprisingly to me, I came across this Washington Post editorial that does the job for me.

I don't know about you, but I find it quite refreshing that the Washington Post editorial page has come to understand that the market is much more effective than government in dealing with energy supply reductions.

Posted by Tom at 9:55 AM | Comments (0) |

Troubles at Patterson-UTI

Snyder, Texas (between Abilene and Lubbock)-based Patterson-UTI Energy, Inc., one of the largest land-based drilling contractors in the U.S., raised a few eyebrows on Friday with the announcement that it is investigating the possible embezzlement of $70 million by a former undisclosed official who apparently arranged for payments to a shell company for assets that were never delivered over a five year period (Chronicle story is here). Although it is not known whether he is the Patterson employee under investigation, Patterson's chief financial officer, Jonathan D. "Jody" Nelson, resigned on Nov. 3 for "personal reasons" and, a day later, he made a regulatory filing of his intent to unload about $13 million of Patterson stock.

Patterson-UTI was was formed in 2001 when the independent exploration and production company Patterson Energy acquired UTI Energy. The company operates about 400 drilling rigs, which is the second-largest land-based fleet in North America behind that of Nabors Industries, and employs about 7,000 employees. The news of the possible embezzlement comes at an otherwise robust time for Patterson and the rest of the oilfield service sector. Rising demand for rigs has driven up utilization rates and the lease cost of rigs to their highest levels since the period of the late 1970's and early 80's. Last year, Patterson-UTI reported profit of $108.7 million on sales of over $1 billion and, for the first nine months of this year, the company reported $247.5 million of earnings on revenue of $1.2 billion. However, after the announcement yesterday, shares of Patterson fell almost 9% on the Nasdaq to close at $30. Options on Patterson's stock also were heavily traded after the news, resulting in wide price swings.

By the way, Patterson-UTI's auditors are PriceWaterhouseCoopers, LLP. I knew you'd want to know.

Posted by Tom at 7:08 AM | Comments (0) |

November 11, 2005

Getting up for the OU-A&M game

As we hope that the next installment of Texas A&M football coach Dennis Franchione's Friday with Fran will be as entertaining as last week's installment, the following are ways in which more than a few Aggie fans are getting up for this Saturday's clash in Norman, Oklahoma between the Aggies and the Oklahoma Sooners:

FireDennisFranchione.com

FireFranPetition.com

FranUnderFire.com, which includes this handy list of embarrassments.

Posted by Tom at 8:42 AM | Comments (0) |

Are the WaPo editors reading Clear Thinkers?

On the heels of yesterday's post regarding General Motors' Enronesque experience, the Washington Post business section leads with this article today that links General Motors and the "b word" in the same headline, and includes the following tidbit of information:

In a research note yesterday, Ronald A. Tadross, an auto analyst at Banc of America Securities LLC, called a bankruptcy filing "inevitable" and put the risk over the next two years at 40 percent, an increase from a previous estimate of 30 percent. Tadross said he thought GM management could be held responsible for the accounting errors and, if the management team is shaken up, the option of a bankruptcy reorganization would become more likely.

The London Daily Telegraph chimes in with the bankruptcy theme, too.

Posted by Tom at 7:16 AM | Comments (0) |

The David Carr dilemma

The Houston Texans face a vexing decision with regard to quarterback David Carr, the team's first draft pick in its existence -- whether to pick up an $8 million option to retain Carr's services over the next four seasons?

In what has become his typically superficial manner, the Chronicle's main NFL beat writer, John McClain (previous posts on McClain here), weighs in with this column in which he contends that the Texans will and should pick up the option to retain Carr's services. McClain reasons that the Texans should retain Carr because "every team in the NFL that needed a quarterback would line up to give him a signing bonus of a lot more than $8 million," although McClain provides no supporting analysis for that conclusion.

Well, McClain may be correct and it may be true that the market for experienced QB's in the NFL mitigates in favor of the Texans picking up Carr's option. However, as with McClain's recent criticism of the Texans' personnel moves, it would be nice if McClain could provide some support for his views. Although Carr's development as a QB has been stunted by the Texans' atrocious offensive line, Carr has not shown many signs that he has the potential to be a top notch NFL QB. He has a sidearm delivery that results in a high number of tipped passes. He does not step up in the pocket well, and his ability to pick up secondary receivers is mediocre, at best. Moreover, just looking at the QB's on other teams in the Texans' division, it's far from clear that Carr would be a hot commodity in the NFL's QB market:

Indianapolis -- Peyton Manning. No way they are in the market for Carr.

Cincinnati -- Carson Palmer. Ditto.

Jacksonville -- Bryan Leftwich. Ditto.

Tennessee -- Steve McNair. Maybe, although owner Bud Adams is notoriously tight and would he view Carr as much of an upgrade over McNair's cheap and servicible backup, Billy Volek? That's certainly far from clear.

Similarly, taking a quick look around the NFL, there does not appear to be a large number of teams who would be competing for Carr's services -- my guesses of potential candidates would be Arizona, Baltimore, Buffalo, Cleveland, Miami, New York Jets, and Tampa Bay, but even most of those teams have viable alternatives who would be far cheaper and not clearly inferior to Carr.

So, McClain may be right about the Texans and Carr. But just as with his recent discovery that the Texans' personnel is deficient, McClain ought to present supporting evidence for his view. Otherwise, his off-the-cuff opinions end up sounding like those of a cheerleader for Carr, just as his similarly sanguine views of Charley Casserly made him appear to be a shill for the Texans' front office before this disastrous season.

Posted by Tom at 6:21 AM | Comments (2) |

Need a job? Try New Orleans

Two and a half months after Hurricane Katrina and the resulting flood hammered New Orleans, this NY Times article notes that the rebuilding of the city is being hampered by a scarcity of labor, a condition that was noted in this earlier post.

Given the massive exodus of people from New Orleans and the relunctance of many former residents to return, my sense is that we are experiencing uncharted waters with regard to the rebuilding of New Orleans. The tremendous loss of jobs almost overnight -- particularly from small businesses that were destroyed by the damage from the flood -- is unprecedented in the modern United States for an area this large. Inasmuch as most of the jobs that are arising as a result of the reconstruction effort are of a different nature from the ones that were lost, many of the people who left New Orleans are not attracted to return by those new jobs. Consequently, my sense is that the key to real rebirth in the area is the re-creation of small businesses, which is a tricky and slow task.

Posted by Tom at 5:31 AM | Comments (0) |

Refco's Phillip Bennett indicted

On a lively Thursday in New York, Phillip R. Bennett, the former CEO of the big commodities broker Refco Inc., was indicted on multiple counts of securities fraud, wire fraud and of making false regulatory filings with the SEC at the same time as creditors in Refco's pending chapter 11 case fought over the price to be paid for the company's key regulated futures business. Previous posts about Mr. Bennett and the Refco saga are here and a copy of the indictment is here.

Refco filed a chapter 11 case on Oct. 17 a week after the company announced that a $430 million debt owed to the company by a firm controlled by Mr. Bennett had been concealed and then repaid by Mr. Bennett. Refco's board placed Mr. Bennett on indefinite leave Oct. 10 and he was arrested on federal securities fraud charges shortly thereafter.

However, the indictment -- as with the previous complaint that was the basis of Mr. Bennett's arrest -- is not particularly persuasive in its description of the alleged criminal conduct. The indictment alleges that, in the late 1990's, Refco suffered hundreds of millions of dollars in bad debts as a result of customer trading losses. The customers were unable to make good on the losses, so Refco was left on the hook because it had extended credit to the customers. Rather than making Refco's financial condition look less healthy by writing off the losses, Mr. Bennett allegedly had the losses assumed by a company that he owned and controlled -- Refco Group Holdings, Inc. ("RGHI") -- and then hid that fact from auditors and investors on multiple occasions by arranging the following series of transactions:

A Refco subsidiary -- Refco Capital Markets, Ltd. -- would make a short term loan (usually, about a two week term) in various amounts ranging from $325 million to $720 million to an unidentified third party, but which was earlier identified as Liberty Corner Capital Strategies;

Liberty Corner would simultaneously make a short term loan to Mr. Bennett's company, RGHI, in the same amount and with the same maturity of its borrowing from Refco Capital (but at a slightly higher interest rate), and Refco the parent would guarantee RGHI's payment of the loan to Liberty Corner;

RGHI would use the loan proceeds from Liberty Corner to pay Refco the amount of its related party indebtedness at the time shortly before the end of an upcoming Refco reporting period. Inasmuch as the debt was paid prior to the end of the reporting period, Refco's auditors did not report the amount of RGHI's previous indebtedness to Refco as related party indebtedness; and

Upon maturity of the two short term loans -- which was timed to occur after the end of Refco's reporting period -- the loans were "unwound" (apparently without telling Refco's auditors) so that RGHI was put back in the position of owing the same amount of related party indebtedness to Refco that it owed before it borrowed the money from Liberty Corner.

Among other questions, the following issues are raised by the indictment:

If RGHI's indebtedness to Refco was truly based upon assumption of third party debts to Refco, then why did the amount fluctuate from time to time?

How, precisely, was the arrangement "unwound" each time? The indictment is silent on that key allegation.

Was Refco's guaranty of RGHI's loan from Liberty Corner disclosed in Refco's regulatory filings?

In essence, the indictment alleges that Mr. Bennett used Refco's creditworthiness to arrange a third party loan to RGHI that was used to pay RGHI's debt to Refco. Putting aside for a moment the disclosure issues raised by securities laws, is there really anything wrong with Mr. Bennett using Refco's credit for that purpose?

Inquiring minds want to know.

Posted by Tom at 3:50 AM | Comments (13) |

November 10, 2005

Roping in the hedge funds

As the regulators and financial media wait on pins and needles for the next Enronesque experience in business, much attention has recently been focused on the generally unregulated -- at least until now -- world of hedge funds.

David Skeel recently published this Legal Affairs article (and this follow up discussion with Business Law Prof blogger Dale Oesterle) in which he argues for more regulation of hedge funds because the pressure that hedge funds face to take unreasonable risks and to show over-the-top returns undermines the integrity of the markets, which will hurt the little guy investor. Meanwhile, in anticipation of the new SEC regulations due to take effect in February that require hedge funds managing more than $25 million to register with the SEC, submit to periodic audits and provide detailed information about their trading, the Wall Street Journal reports today that many funds will not be registering with the Securities and Exchange Commission due to loopholes provided by the agency. The entire thrust of the article is "what are these guys hiding?"

Into this fray enters the indomitable Larry Ribstein with this timely post in which he proposes that everyone back off and think about whether the proposed regulations are really a solution to the supposed problem for which they are intended:

[I]t is important to distinguish between two types of problems that are often melded together in the commentary on hedge funds: the damage that these funds supposedly do to others, and the damage that hedge fund managers do to their investors. Pro-regulatory hedge fund critics often play a kind of shell game, obfuscating the goals of the regulation by sliding between these very different objectives. Regulatory prescriptions for one problem may even exacerbate the other (e.g., the two-year lockup rule).

The basic problem with focusing on the damage hedge funds do to others is that this is often covered, or should be covered, by rules that directly address the supposedly bad behavior. But regulators often find enacting such rules inconvenient, because then they would have to actually identify the bad behavior and show how it is harmful. It’s easier to deal with this problem by tarring the people that are doing it, and putting them out of business – the same strategy that worked with Mike Milken and takeovers. This is not only a poor way to address the supposedly bad behavior, but it risks reducing the clearly legal and socially productive behavior that these same supposedly bad guys engage in – e.g., disciplining unproductive corporate managers.

As noted earlier here, regulators took a quite similar approach in the wake of Enron to hammer and ultimately constrict a highly productive means for businesses to hedge risk -- i.e., structured finance transactions, particularly in the gas trading industry. Professor Ribstein goes on to specify examples of where regulators, on the murkiest of grounds, seek to rein in what they perceive as improper behavior of hedge funds, and then concludes with the following wise advice:

It may be that the real problem with hedge funds, and the real reason they are in the regulatory crosshairs, is that they, like Milken and his ilk, are a potential mechanism for reshaping corporate control. Before we continue down this regulatory path, we ought to better understand why we’re going there, and the potential costs of doing so.

Update: Professor Bainbridge chimes in with this insightful post,, in which he observes the following:

One of the strongest arguments against hedge fund registration was that investors in them are typically institutions (pension funds and so on) and wealthy individuals. In other words, folks for whom caveat emptor arguably is all the protection they need. As with any principal-agent context, liquidity provided one of the principal protections for hedge fund investors. If the manager shirked or otherwise misbehaved, or even just had a run of bad luck, investors could exit. The risk that investors would bail, in turn, provided a substantial incentive for hedge fund managers.

The problem with the SEC's rule should now be apparent: It's reducing liquidity by increasing lock up periods during which hedge fund investors can't run for the exits. (Imagine being in a theater that's on fire but the doors are locked.) The SEC thus has created a situation in which it is forcing hedge fund investors to go on protecting themselves, while simultaneously disarming investors by depriving them of their most effective weapon.

I'd call that a bad rule. A very bad rule.

Posted by Tom at 9:21 AM | Comments (1) |

Charlie Casserly said what?

Chronicle sportswriter John Lopez has a good column today regarding the poor personnel moves of Texans' general manager Charlie Casserly that have been primarily responsible for the Texans' disastrous season this year. Included in the article was the following quote from Casserly:

"We're 1-7, but we're not a 1-7 team," Casserly said. "This isn't a sinking ship deal. I'm not trying to blame coaching or anything like that. Sometimes these things just happen. If we make a couple of good moves, boom, we're back to where we should be next year."

H'mm. Of their eight games this season, the Texans have been competitive in precisely three. QB David Carr continues to be sacked more than any other quarterback in the NFL, and the defense is one of the worst in the league in terms of stopping the run and in sacking the opposing team's quarterback. Sounds precisely like a 1-7 team to me.

Oh well, at least Casserly doesn't blog.

Posted by Tom at 8:00 AM | Comments (4) |

Where it first does not succeed, the Enron Task Force tries, tries again

The Chronicle's Mary Flood reports in this article that the Enron Task Force has obtained three "streamlined" indictments against the five former Enron Broadband executives who were the subject of the previous failed Task Force prosecution over the same subject matter. As is the Task Force's policy, they leaked a copy of the superceding indictments to the media before they were filed on the electronic docket of the case, so a copy of the indictment is not yet available. I will post a copy of each indictment when they become available.

As Ms. Flood's article notes, the five former executives will not be tried together this time around. Kevin Howard, former EBS CFO, and Michael Krautz, former EBS senior accounting director, will be tried together in a trial currently scheduled for May, 2006 on four counts that they conspired to commit wire fraud and falsify books and records relating to the Task Force's allegation that they created a phony sale of video-on-demand profits in order to inflate EBS earnings. Next, former EBS executive Scott Yeager will be tried later that summer on a total of 13 counts of insider trading and money laundering. Finally, former co-CEO of EBS, Joe Hirko, and Rex Shelby, former senior vice president of engineering and operations, will be tried in September, 2006 on conspiracy to commit wire and securities fraud, as well as multiple counts of securities fraud, wire fraud and insider trading.

Of course, all of these trials will be anticlimactic compared with the trial of the Task Force's legacy case against former Enron executives Ken Lay, Jeff Skilling, and Richard Causey, which will crank up in mid-January, 2006.

Posted by Tom at 6:34 AM | Comments (0) |

Sleep apnea and strokes linked

A Yale University study of 1,022 patients over the age of 50 published in this week's New England Journal of Medicine concludes that obstructive sleep apnea more than doubles the risk of a stroke or death and that severe cases of sleep apnea more than triple the risk, even after even adjustment for other stroke-risk factors such as diabetes, hypertension and obesity. A number of previous studies have found links between sleep apnea and serious cardiovascular disease, but a link between sleep apnea and strokes had not yet been established. Strokes are the third leading cause of death in the U.S. after heart disease and cancer.

About 20% of American adults suffer from at least some form of sleep apnea, although physicians generally do not recommend treatment unless the condition involves five or more pauses in breathing per hour of sleep along with other symptoms, such as daytime drowsiness. Although only about a fifth of sleep apnea cases are considered severe, researchers and physicians estimate that more than half of the severest cases in the United States still go undiagnosed. Obstructive sleep apnea involves the muscles in the throat becoming so relaxed that the airway becomes all or partially closed, and with regard to the rarer central sleep apnea, the body temporarily stops making any effort to breathe. Common symptoms include daytime drowsiness and loud snoring, choking or gasping during sleep, although the episodes often fail to wake the person suffering from the condition.

Interestingly, one question that the Yale study does not answer is whether treating sleep apnea will reduce the incidence of strokes. In the Yale study, of the 72 sleep apnea patients who died of strokes, many of these patients were undergoing various forms of treatment for the condition. However, even with treatment, the group still had an elevated risk of stroke and death, which raises the question of whether treating sleep apnea will actually decrease the stroke risk measurably.

Posted by Tom at 5:45 AM | Comments (0) |

Meanwhile, with regard to Shell's Enronesque experience . . .

Remember Royal Dutch/Shell's Enronesque experience relating to overstatement of reserves from last year?

Well, the British equivalent of the SEC -- the Financial Services Authority, or FSA -- announced yesterday that it had concluded its investigation of former senior Shell executives Philip Watts and Walter van de Vijver and found no wrongdoing relating to the executives' involvement in the company's overstatement of energy reserves last year. The SEC and the Justice Department are still conducting investigations of the two former executives.

Funny how the FSA's announcement of yesterday did not get quite as much play in the media as the ouster of the two executives from Shell last year as the company's overstatement came to light.

Posted by Tom at 5:12 AM | Comments (2) |

GM's Enronesque experience continues

Already under the pressure of an SEC investigation into its accounting, beleagured automaker General Motors Corp. announced late yesterday -- after the close of New York Stock Exchange trading -- that it will restate financial results for 2001 by reducing income generated from accelerated booking of credits from suppliers. The amount of the write-down will be between $300 to $400 million, which represents about 50% of GM's profit reported at the time. Although the announcement came after the close of trading, GM's shares yesterday fell to their lowest level in almost 15 years (GM shares are down almost 40% this year) as GM attempts to endure the financial punches that are inevitably associated with losing almost $3 billion this year. Earlier posts on GM's increasing problems are here.

GM did not disclose yesterday whether its restatement involved transactions with its former parts subsidiary, Delphi Corp. Earlier this year, Delphi disclosed it would need to restate results for several years after an internal investigation revealed improper booking of revenue from technology contracts and rebates that should have been spread over the life of contracts. The issue of how to book rebates and other credits from suppliers has tripped up several troubled businesses, including supermarket chain Royal Ahold NV and retailer Kmart Corp. Demanding credits from suppliers is a common practice in many industries, but if those credits are rebates related to larger orders from suppliers, they are supposed to be booked as income over time and not immediately.

In another ominous sign, GM disclosed in an SEC filing yesterday that it has withdrawn about $2 billion this year from a fund earmarked for paying hourly-wage and retiree employee health benefits to cover ongoing health-care costs as it continues "evaluating the need for additional withdrawals as the cost of health care continues to adversely affect GM's liquidity."

Sounding absolutely Enronesque, don't you think?

Posted by Tom at 4:37 AM | Comments (0) |

November 9, 2005

Catching up with the NBA

As noted in earlier posts here and here, I find it difficult to generate much enthusiasm for the local professional basketball team, the Houston Rockets. This year's club is mildly interesting, with one of the best perimeter players in the league -- Tracy McGrady -- teamed with one of the best big men -- Yao Ming. They are both in the prime of their respective careers, so you would think that the team would be a title contender. However, as has been often the case for the Rockets throughout their existence, the team has not found the point guard who can push all the right buttons (remember Matt Maloney?) and propel the team into the NBA's elite teams. This year, the Rockets are trying Rafer Alston at the point, but it remains to be seen whether he is the answer.

Despite my lack of enthusiasm for the Rockets, I did notice during the last NBA season that the games were much more interesting than in the previous three seasons or so. A number of really special young players had arrived on the scene -- notably Cleveland's LeBron James and Miami's Dwayne Wade -- and the pace and intensity of the play made NBA games enjoyable to watch again. Along those lines, Patrick Hruby of ESPN.com notes in this article that many of the complaints that one commonly hears about the NBA are myths. One of the more interesting observations is what really distracts players while they are shooting free throws:

As it turns out, Thunderstix and wiggling balloons have little effect because the brain simply blocks out random motion, like white noise on a television screen. According to [a] Slate.com article, fans behind the baseline would be better off moving side-to-side in unison.

Why? Confronted with a field of background motion, observers tend to believe that they are moving while the background remains still -- think of sitting on a stopped subway train while an adjacent train passes. David Whitney, a visual scientist at the University of California-Davis, has demonstrated that a field of background motion can influence hand motions, such as the flick of the wrist on a free throw.

[Former NBA player Steve] Kerr concurs.

"The most effective one I've seen might have been at Duke, or maybe Kansas," he says. "As soon as the guy was about to shoot, the fans would all move from the right side to the left. It would create this visual of everything moving."

In short, the Rockets need to crank up the Aggie War Hymn during the opposing team's free throws.

Meanwhile, addressing the true reason for the NBA's absurdly long 82 game regular season, this Eye on Gambling post provides a quick and dirty way to handicap -- or as Malcolm Gladwell would put it, to "thin slice" -- NBA games.

Posted by Tom at 7:20 AM | Comments (2) |

The anti-obesity industry

Coming off his Texas barbeque excursion, Marginal Revolution's Tyler Cowen notes that J. Eric Oliver, a political science professor at the University of Chicago, has entered the debate a new book called Fat Politics (Oxford 2005), in which Professor Oliver argues that a handful of doctors, government bureaucrats and health researchers -- funded by the drug and weight-loss industry -- have campaigned to classify more than sixty million Americans as "overweight," to inflate the health risks of being fat, and to promote the idea that obesity is a killer disease. The Publishers Weekly review of the book notes the following:

It's not obesity, but the panic over obesity, that's the real health problem, argues this scintillating contrarian study of the evergreen subject of American gluttony and sloth. Political scientist Oliver condemns what he feels is a self-interested "public health establishment" -- obesity researchers seeking federal funding, pharmaceutical and weight-loss companies peddling diet drugs and regimens, bariatric surgeons and other health-care providers angling for insurance reimbursement -- for spuriously characterizing fatness as a disease. He debunks the dubious science and alarmist PR that fuels their campaign, taking on arbitrary Body-Mass Index standards that slot even Michael Jordan in the overweight category, state-by-state maps of obesity rates that make fatness look like a contagion spreading over the countryside, and flimsy research studies that vastly exaggerate the danger and costs of weight gain. Oliver also examines American attitudes towards obesity, probing the abhorrence of fatness implicit in the Protestant ethic and, less plausibly, tying our contemporary feminine ideal of the emaciated supermodel to a confluence of sociobiology and the economics of the urban sexual marketplace. Arguing that fatness is perfectly compatible with fitness, he contends that scapegoating obesity drives Americans to experiment with dangerous crash diets, appetite suppressants and weight-loss surgeries, while distracting us from underlying harmful changes in the American lifestyle -- mainly our incessant snacking on junk food and shunning of exercise and physical activity, of which weight gain is perhaps merely a "benign symptom." Oliver provides a lucid, engaging critique of obesity research and a shrewd analysis of the socioeconomic and cultural forces behind it. The result is a compelling challenge to the conventional wisdom about our bulging waistlines.

Here is also an LA Times review of the book and several prior posts that have examined the issues relating to the increasingly obese nature of America's population.

As several of the earlier posts note, Professor Oliver's thesis has a ring of truth to it, although most of us are conflicted by our anecdotal experiences in which we notice large numbers of overweight and out-of-shape people in the course of our daily lives. In many respects, the core problem is widespread ignorance about nutrition, the difference between exercise and recreation, and the fact that exercise is a poor means of weight-control, at least in the short term. My late father used to comment that, if you are riding a stationary bike for an hour to lose weight, then you could achieve the same benefit in terms of reducing calories for a lot less effort by simply eating one less helping of mashed potatoes at dinner.

Posted by Tom at 6:31 AM | Comments (4) |

Beating a dead Andersen

The Chronicle's Mary Flood, back from a well-deserved vacation, is again writing on Enron matters and, in this article, notes that the Fifth Circuit has asked the attorneys involved in the Arthur Andersen criminal case to advise the Court on whether the case should be remanded to District Court for re-trial or simply dismissed altogether after the Supreme Court's decisive opinion overturning the firm's conviction. Using prediction skills that have become well-honed from dealing with the Enron Task Force over the past several years, Ms. Flood speculates that the Task Force will request that the Fifth Circuit remand the case to the District Court for a new trial.

Other than providing an annuity for Andersen defense attorney Rusty Hardin, what possible benefit could be derived from a re-trial of a dead accounting firm? The fact that such a re-trial is even being considered reflects that the misguided criminal investigation into Enron has officially gone from being merely abusive and desperate to truly absurd.

Posted by Tom at 5:11 AM | Comments (0) |

November 8, 2005

Coach Queeg at A&M?

Some people simply should not blog. Let me put this in context.

Two weekends ago, Iowa State hammered Texas A&M 42-14 in front of the fifth largest crowd in the history of Kyle Field. Then, last Saturday night, Texas Tech blistered the Aggies 56-17 in Lubbock.

In between those two debacles, Texas A&M head coach Dennis Franchione published this post on his Coach Fran website, which included the following:

From appearances at a press luncheon, and a Big 12 phone conference, and at the local Quarterback Club, and at our radio show, the most-asked question of the past week about our game was, "Why didn't you run Jorvorskie Lane on third-and-one?"

Some people asked that question and really didn't care about the answer. In fact, some people right now don't care about anything we say, which is why in our camp we are working hard on doing instead of talking. Other than a few coaches who look at recruiting news, our staff does not spend time on the Internet and this week we didn't spend time with emails or letters, either.

And if that was not sufficiently patronizing for you, try this:

In case you are interested in understanding why we do or don't run a certain play at any given time, the best way to help is to tell you how we design our offense and the game plan. The easiest thing in the world is to sit in the stands or in a press box and have a simple take on what's happening on the field. If it was easy as walking in here and saying, "OK, let's hand the ball off to this guy 25 times and we'll win," we could save a lot of time and effort and get more sleep.

Which is followed by the following pearl of football wisdom:

[F]rom an ancient Asian religion there is a saying, "Wise people seek solutions. Others only cast blame."

The entire piece is not as defiant and condescending as the above excerpts, but you get the idea. As you might expect, more than a few Aggie fans are not pleased with Coach Fran's piece. Meanwhile, the Aggies are 13 point underdogs this Saturday at Oklahoma, where the Aggies lost 77-0 two years ago during Coach Fran's first season. And second-ranked Texas looms after that game.

Can Coach Fran survive four straight blowouts to end his third season at A&M, two of which have been losing seasons? My sense is that he's got one more season, but you never know. For us old-timers who recall the two week meltdown of Emory Bellard as A&M's head coach back in 1978, stranger things than an unexpected firing have happened to coaches in the passionate culture that is Texas A&M football.

Posted by Tom at 12:05 PM | Comments (2) |

Certain KPMG tax shelter civil suits stayed

In an interesting development, U.S. District Judge Vaughn R. Walker in San Francisco stayed a series of civil lawsuits over the legality of some KPMG LLP tax shelters pending the outcome of parallel criminal proceedings against certain of the individual defendants in New York. Prior posts on the KPMG tax shelter cases are here.

Normally, it's the defendants who are facing criminal charges in parallel criminal proceedings who seek a stay of the civil lawsuit over the same subject matter. The argument in favor of a stay is that a defendant should not be required to choose between asserting the privilege against self-incrimination, on one hand, and effectively defending a civil lawsuit, on the other, while a criminal investigation of the subject matter involved in the civil lawsuit is ongoing.

However, in these particular cases, Presidio Growth LLC, an advisory firm that had been set up to help KPMG market some of the tax strategies at issue in the criminal case, had filed the civil lawsuits requesting a declaratory judgment that certain of the tax shelters at issue in the criminal cases were legitimate. A victory for Presidio in the civil cases would have given the defendants in the criminal proceedings ammunition to argue that the civil court ruling establishes that reasonable doubt exists over the illegality of the tax shelters that are at the core of the criminal indictment. As a result, the Justice Department -- rather than the individual defendants facing the parallel criminal proceedings -- asked Judge Walker to stay the civil lawsuits pending the outcome of the criminal proceedings, and he granted the prosecution's request.

Posted by Tom at 6:16 AM | Comments (3) |

Keeping up with Merck's Vioxx cases

Well, it's only two down and about 6,500 to go, but last week's take nothing verdict in the latest Merck/Vioxx trial evened Merck's record in the Vioxx cases at 1-1 (earlier posts on Merck and Vioxx are here). Since that verdict, I have been meaning to pass along that Ted Frank and Walter Olson over at PointofLaw.com have created this handy Vioxx case page where you can keep up with developments in the Merck/Vioxx cases. Check it out.

Posted by Tom at 5:51 AM | Comments (0) |

The effect of failed urban economics on the French riots

Joel Kotkin is an Irvine Senior Fellow at the New America Foundation, the author of The City: A Global History (Modern Library, 2005) and a friend of Houston Strategies' Tory Gattis. Mr. Kotkin came to my attention recently for his insightful writings on urban planning (here and here) during the aftermath of Hurricane Katrina.

In this OpinionJournal op-ed, Mr. Kotkin addresses the unintended consequences in France of governmental policies such as high taxation, the welfare state and the economic barriers to entry caused by excessive regulation:

The French political response to the continuing riots has focused most on the need for more multicultural "understanding" of, and public spending on, the disenchanted mass in the country's grim banlieues (suburbs). What has been largely ignored has been the role of France's economic system in contributing to the current crisis. State-directed capitalism may seem ideal for such American admirers such as Jeremy Rifkin, author of "The European Dream," and others on the left. Yet it is precisely this highly structured and increasingly infracted economic system that has so limited opportunities for immigrants and their children. In a country where short workweeks and early retirement are sacred, there is little emphasis on creating new jobs and even less on grass-roots entrepreneurial activity.

Read the entire piece.

Posted by Tom at 5:09 AM | Comments (2) |

Guidant: "Spitzer is no stinking MAE"

Undeterred by the Lord of Regulation's entry into the dispute, troubled medical-device maker Guidant Corp. filed a lawsuit yesterday in New York City against disenchanted merger partner, Johnson & Johnson. Guidant is attempting to persuade the court to overrule J&J's stance that Guidant's recent troubles constitute a "material adverse effect" on Guidant's business that allows J&J to walk away from its proposed $25.4 billion merger ($76 per share) with Guidant that the companies announced last December.

In the meantime, J&J's MAE argument would appear to be improving by the day. Coming on the heels of the Spitzer lawsuit last week, Guidant announced yesterday that it is the subject of civil investigations by attorneys general in Arizona, Oregon and Illinois on behalf of a total 34 states and the District of Columbia. Moreover, the company announced that its third-quarter net income declined to $65.4 million (20 cents a share) from $153.6 million (48 cents a share) from a year ago, and that sales fell almost 15% to under $800 million from $924.5 million a year ago. Finally, just for good measure, Guidant disclosed in its quarterly filing that the Securities and Exchange Commission has begun a formal inquiry into issues relating to the product-malfunction disclosures and trading in Guidant stock. Johnson & Johnson asserts in this press release that it isn't required to go through with the deal because Guidant's recent recalls and warnings regarding its medical devices -- not to speak of the Spitzer lawsuit -- are "serious matters affecting both Guidant's short-term results and long-term outlook." J&J contends that the malfunctions, combined and the resulting sales drop, represent a "material adverse effect" on Guidant's business that allows J&J to walk the deal.

On the other hand, Guidant's lawsuit contends that the damage from its recent spate of malfunction announcements is a temporary blip on its otherwise bullish business radar screen. Inasmuch as J&J was banking on anticipated explosive growth in Guidant's heart-device business in making the deal and there is no change of circumstances regarding that anticipated growth, Guidant contends that the court should specifically enforce -- i.e., require J&J to consummate -- the deal.

William K. Sjostrom, Jr. and Dale Oesterle over at the Business Law Prof Blog have been following developments in the unwinding of the Guidant/J&J merger closely and this update post contains links to their prior posts on the saga.

Posted by Tom at 4:24 AM | Comments (0) |

November 7, 2005

More on the talented Mr. Munitz

Former University of Houston chancellor and current J. Paul Getty Trust president Barry Munitz probably didn't even notice this earlier post regarding his mercurial career in public life.

But I bet even the talented Mr. Munitz notices when the New York Sunday Times dedicates a long article to the current troubles of the Getty Trust.

Posted by Tom at 9:04 AM | Comments (0) |

Final PGA Tour Money List

With Brad Bryant's surprisingly easy win in the season-ending Tour Championship yesterday, the PGA Tour's all-important money list is final for the 2005 season. Some interesting notes:

Tiger Woods won again with over $10.6 million in winnings, which works out to be over half a million per tournament that he enteded in 2005.

It took a cool $626,736 in winnings to make the top 125, which is a coveted position because the 125 top money-winners from the 2005 season are exempt from qualifying for most PGA Tour events during the upcoming 2006 season.

Three 2004 Nationwide Tour graduates made the top 125, but ten 2004 Q-School graduates made the list and two Q-school grads (Sean O'Hair and Lucas Glover) finished in the top 30.

Apart from Gatesville's Bryant at no. 9 with almost $3.25 million in winnings, Justin Leonard of Dallas was the top Texan money-winner at no. 12 with over $2.6 million in winnings, followed by Chad Campbell of Andrews at no. 20 with almost $2.4 million. The Woodlands resident K.J. Choi came in at no. 37 with over $1.7 million in earnings, while Steve Elkington of Houston's Champions Golf Club had a comfortable bounce back year at no. 54 with over $1.4 million.

54 year old Tom Kite's plan to play the regular PGA Tour in 2005 resulted in just 11 tournaments and a bit over $100,000 in winnings, placing him 217th on the list.

The sad golfing saga of David Duval continues, as the former no. 1 golfer in the world came in 260th on the money list with just a bit over $7,500, which works out to be a Tour-low $381.50 per tournament.

Mr. Duval -- who continues to have an exemption into most tournaments because of his 2001 British Open and 2000 Players' Championship victories -- may be carrying his own bag in future tournaments at that earning level.

Posted by Tom at 8:17 AM | Comments (0) |

Another one bites the dust

Flyi Inc., which spun off a year ago into the low-fare independent airline called "Independence Air" after beginning as a contract carrier for United Airlines and Delta Air Lines Inc., filed a chapter 11 case early Monday morning, joining a good part of the American airline industry in keeping the bankruptcy bar fat and happy.

Meanwhile, just to remind you that markets often work in mysterious ways, airline stocks are rebounding.

Posted by Tom at 7:10 AM | Comments (0) |

Willy Taveras should not be the NL ROY

I understand that the Stros' public relations department wants centerfielder Willy Taveras to be the National League Rookie of the Year, but why does the Chronicle lap up such nonsense with unqualified support?

As noted in this previous post, Taveras did reasonably well this season jumping from Double A ball to the Major Leagues, but he remains a decidedly below-average player in the most important aspect of baseball, which is creating runs so that your team can score more than the opposition and win games. Taveras generated 13 fewer runs this season than an average National League hitter would have generated in the same number of plate appearances ("RCAA").

Moreover, in almost every key offensive category -- on-base average, slugging percentage, OPS, etc. -- Taveras is not only below average, but far below average. Batting lead off for much of the season, Taveras drew only 25 walks (an average NL centerfielder would have had over twice that many) in about 625 plate appearances (Lance Berkman, in comparison, drew 91 in about 560 plate appearances), and had only 20 extra base hits (an average NL centerfielder would have had 49). Although Taveras' defense improved during the second half of the season, the runs that he saves by his defense is less than 5 per season and, thus, not close to offsetting the deficit that he generates in run-scoring. Only because of his batting average (.290) -- which happens to be among the most misleading of hitting statistics -- is Taveras considered by superficial observers to be a good player. Taveras' on-base percentage -- a much better indicator of run-scoring potential than batting average -- was .324, well below the National League average of .339. In short, being fast and beating out bunts and infield grounders does not equate necessarily to being a good ballplayer.

Taveras is only 23 and made the difficult jump from Double A ball to the Majors this season, so he still may improve over the next several seasons. If he can improve his walk rate to raise his on-base average to around .380 or so, and improve his power to an average or just below-average slugging percentage, then Taveras can be a reasonably effective National League centerfielder. But Taveras remains a well below-average National League player at this point, and lapping up the Stros' propaganda that he should be the Rookie of the Year Award is not a particularly good way to be objective about the fact that he needs to improve in order to become even an average National League player, much less an award-winning one.

By the way, the Phillies' Ryan Howard should be the NL Rookie of the Year.

Posted by Tom at 5:56 AM | Comments (2) |

Thinking about the source of the French riots

Rioting across France hit a new peak during the 11th night of rioting last night, as the violence -- initially centered in the Paris suburbs -- worsened elsewhere in France. From the original outburst of violence in suburban Paris housing projects, the violence has expanded into a widespread show of disdain for French authority from youths, mostly the children of Arabs and black Africans who are the products of high unemployment, poor housing and discrimination in French society. This Opinion.Telegraph piece provides a British perspective on the current situation.

Interestingly, Theodore Dalrymple -- the pen name of British psychiatrist and author, Anthony Daniels -- predicted all of this back in 2002 in this City Journal piece on the developing European underclass:

Whether France was wise to have permitted the mass immigration of people culturally very different from its own population to solve a temporary labor shortage and to assuage its own abstract liberal conscience is disputable . . . Indisputably, however, France has handled the resultant situation in the worst possible way. Unless it assimilates these millions successfully, its future will be grim. But it has separated and isolated immigrants and their descendants geographically into dehumanizing ghettos; it has pursued economic policies to promote unemployment and create dependence among them, with all the inevitable psychological consequences; it has flattered the repellent and worthless culture that they have developed; and it has withdrawn the protection of the law from them, allowing them to create their own lawless order.

No one should underestimate the danger that this failure poses, not only for France but also for the world. The inhabitants of the cités are exceptionally well armed. When the professional robbers among them raid a bank or an armored car delivering cash, they do so with bazookas and rocket launchers, and dress in paramilitary uniforms. From time to time, the police discover whole arsenals of Kalashnikovs in the cités. There is a vigorous informal trade between France and post-communist Eastern Europe: workshops in underground garages in the cités change the serial numbers of stolen luxury cars prior to export to the East, in exchange for sophisticated weaponry.

A profoundly alienated population is thus armed with serious firepower; and in conditions of violent social upheaval, such as France is in the habit of experiencing every few decades, it could prove difficult to control. The French state is caught in a dilemma between honoring its commitments to the more privileged section of the population, many of whom earn their livelihoods from administering the dirigiste economy, and freeing the labor market sufficiently to give the hope of a normal life to the inhabitants of the cités. Most likely, the state will solve the dilemma by attempts to buy off the disaffected with more benefits and rights, at the cost of higher taxes that will further stifle the job creation that would most help the cité dwellers. If that fails, as in the long run it will, harsh repression will follow.

Following up on one of those themes, Dalrymple writes today in this Wall Street Journal ($) op-ed that France's economic policies that end up encouraging unemployment have much to do with the current situtation:

A French employee works 30% fewer hours than a British worker, and a much smaller percentage of the French population than the British works at all, yet total French output is very nearly equal in value to British. In other words, the French are much more efficient economically than the British. But their relative efficiency has been bought at a price: the creation of a large caste of people more or less permanently unintegrated into the rest of society.

A Martian observing France dispassionately, without ideological preconceptions, would come to the conclusion that the French had accepted with equanimity a kind of social settlement in which all those with jobs would enjoy various legally sanctioned perks and protections, while those without jobs would remain unemployed forever, though they would be tossed enough state charity to keep body and cellphone together. And since there are many more employed people than unemployed people in France, this is a settlement that suits most people, who will vote for it forever. It is therefore politically unassailable, either by the left or the right, which explains the paralysis of the French state in the present impasse.

The only fly in the ointment (apart from the fact that the rest of the economies of the world won't leave the French economy in peace) is that the portion of the population whom the interior minister, Nicolas Sarkozy, so tactlessly, but in the secret opinion of most Frenchmen so accurately, referred to as the "racaille" -- scum -- is not very happy with the settlement as it stands. It wants to be left alone to commit crimes uninterrupted by the police, as is its inalienable right.

Unfortunately, to economic division is added ethnic and cultural division: For the fact is that most of Mr. Sarkozy's racaille are of North African or African descent, predominantly Muslim. And the French state has adopted, whether by policy or inadvertence, the South African solution to the problem of social disaffection (in the days of Apartheid): It has concentrated the great majority of the disaffected paupers geographically in townships whose architecture would have pleased that great Francophone (actually Swiss) modernist architect, Le Corbusier, who -- be it remembered -- wanted to raze the whole of Paris and rebuild it along the lines of Clichy-sous-Bois (known now as Clichy-sur-Jungle).

If you wanted to create and run a battery farm for young delinquents, you could hardly do better. But as one "community leader" put it when asked whether he thought that better architecture might help, there's no point in turning 15-story chicken coops into three-story chicken coops.

Meanwhile, Victor Davis Hanson reminds us in this City Journal piece that the core problem remains radical Islamic fascism, the importation of which America remains strangely tolerant:

Some say, reassuringly, that Islamic extremism has little appeal to America’s growing Muslim population. America prides itself on being unlike Europe in its powers of assimilation. Thanks to the melting pot and a vigorous economy, this argument goes, we have no Marseilles-like Muslim ghettos or Rotterdam-style “dish cities,” blighted Islamic suburbs where assimilation remains rare and terrorist sympathies widespread even after generations of living in the West. We certainly don’t have the difficulties in assimilating Muslims that England experiences. A chilling Daily Telegraph poll, for example, found that one in four British Muslims sympathized with the motives of July’s subway killers, about one in five voiced little loyalty toward Britain, and a third felt that Western culture was “decadent” and that they should help “to bring it to an end.”

Yet U.S. self-congratulation is premature. Before we condemn Britain as hopelessly retrograde, we need to recognize that we have no idea how much some American Muslims support jihadist causes—comprehensive polls don’t exist. Of the few surveys taken, the results aren’t encouraging. The Hamilton College Muslim America poll of April 2003 revealed that 44 percent of U.S. Muslims had no opinion on whether Usama bin Ladin was involved with the September 11 attacks. Only one out of three blamed al-Qaida. . . .

If we really are in a war against Muslim terror, our enemies and those who support or appease them pose a quandary on the home front unlike anything we have faced in past struggles. . .

Yet immigration control—as the Dutch and French have learned—may be the most powerful tool in the war against the jihadists. Not only does it help keep terrorists out, it also carries symbolic weight. In the Middle East, America is worshipped even as it is hated—constantly slurred even as it proves the Number One destination for thousands upon thousands of would-be immigrants from the Islamic world. Once we have deported the Islamists, and Middle Easterners and other Muslims find it much harder to enter the U.S. because of their governments’ tolerance for radical anti-Americanism, the message will resound all the more loudly in the Muslim world itself that terrorism is intolerable.

Such toughness opposes the current orthodoxy, which holds that curtailing immigration from the Arab and Muslim world will cost us a key opportunity to inculcate moderates and eventually send back emissaries of goodwill. Maybe; but so far, the profile of the Islamic terrorist is someone who has paid back our magnanimity with deadly contempt. Just as bin Ladin, Dr. Zawahiri, and the Pakistanis suspected of bombing the London subways were not poor, uneducated, or unfamiliar with the West, so too we find that those arrested for terrorist activities on our shores seem to hate us all the more because of our liberality.

Perhaps if the message does begin to be heard that America is as unpredictable as it is merciless toward the advocates and supporters of radical Islam, then the much praised but rarely heard moderates of the Muslim world will at last step forward and keep the few from ruining things for the many. Meantime, we should stop allowing illiberals into the United States—illiberals who either wish to undermine Western tolerance or won’t worry too much when others in their midst try.

Posted by Tom at 4:34 AM | Comments (0) |

November 6, 2005

2005 Weekly local football review

Texas Longhorns 62 Baylor 0.

The Longhorns (9-0; 6-0 Big 12) relentless march to the BCS National Championship Game against USC continued on Saturday as the Horns barely broke a sweat in racing past undermanned Baylor and Miami took care of Virginia Tech's dream of sneaking past the Horns in the BCS standings. The Horns face a scrimmage against Kansas at home, a rivalry game against a demoralized Aggie team in College Station, and a reasonably competitive game against Colorado in the Big 12 Championship game in in early December at Reliant Stadium. But make no mistake about it -- this Texas team is making its reservations for Pasadena in the first week of January and only a huge upset could scuttle those plans.

Texas Tech 56 Texas Aggies 17.

The Aggies (5-4; 3-3 Big 12) officially packed this season in on Saturday night as the Red Raiders (8-1; 5-1 Big 12) beat the Aggies for the sixth straight time in Lubbock. As predicted earlier, the 16.5 point spread in favor of Tech was the lock bet of the year, and with upcoming games at improving Oklahoma and at home against Texas, the Aggies are facing an almost certain second losing season in the first three seasons of the Coach Fran era. A&M's football program is now clearly among the most underachieving programs in major college football.

Jaguars 21 Texans 14.

The Texans (1-7) continued their march to the number one choice in the 2006 NFL Draft by gift-wrapping a win to a listless Jaguars team Sunday afternoon in Jacksonville. After the Texan defense shut out the Jaguars in the first half and stopped them again on their first series in the second half, Texans QB David Carr fumbled deep in Texan territory while being sacked. The Jags recovered and took in for a score and then tacked on scoring drives of 80 and 82 yards in the fourth quarter to seal the win, prompting Carr and defensive lineman Gary Walker to get into a shouting match as they walked off the field. The Texans go to Indianapolis next week to be served as sacrificial lambs to Peyton Manning and Co., and then return for two straight home games against Kansas City and St. Louis.

Central Florida 31 Houston Cougars 29.

Sigh. Watching the Cougars (4-4; 3-2 CUSA) is just plain frustrating. Penalties, missed tackles, turnovers, tipped passes, and questionable playcalling interspaced with a few big plays that keep the Coogs in the game. Alas, it's hard to beat a team when you give up 500 yards of total offense. Amazingly, the Coogs can still become bowl eligible by winning at least two out of their three remaining home games against Southern Mississippi, S.M.U., and Rice.

SMU 27 Rice 0.

The Owls (0-8; 0-3 CUSA) now have lost 14 straight, the longest losing streak in Division 1A football. After mustering only 230 yards total offense against a bad SMU team (3-6; 2-3 CUSA), the prospects for a win in their remaining games against Tulane, Central Florida and Houston do not appear to be particularly good. The Ken Hatfield firing watch continues.

The Cowboys (5-3) were idle this week, but play three games in 11 days starting next Sunday at Philly, and then at home against Detroit and Denver.

Posted by Tom at 7:15 PM | Comments (2) |

November 5, 2005

Daniel Drezner lands on his feet

The University of Chicago's loss is Tufts University's gain.

Hearty congratulations are in order for Professor Drezner, who is one of the pioneers of the blogosphere.

Posted by Tom at 10:18 AM | Comments (2) |

Tyler Cowen discovers Texas barbeque

Marginal Revolution's Tyler Cowen has been eating Texas barbeque this week in Lockhart and he is finding it to be a very satisfying experience. Indeed, one of the many pleasures of living in Texas is taking a day to visit several of the charming small towns in the triangle formed by the cities of Houston, Austin and San Antonio, and sampling the local barbeque. One of my fondest memories from years ago is accompanying a client to several of these towns as we took a day to meet witnesses in a lawsuit I was defending for him. Each meeting took place in each town's best local barbeque restaurant and, of course, we sampled the barbeque at every spot. To this day, I have not come up with a better way to prepare for a trial.

Posted by Tom at 9:54 AM | Comments (0) |

A snarky week in Strosland

Kevin Whited and I have been shaking our heads this week over the barbs that have been being flying to and from the Stros' front office. The Stros' front office hasn't been involved in this kind of flame war since the days when the late Stros owner John McMullen teed off on former Stros general manager Tal Smith and Mr. Smith responded with a defamation lawsuit against Mr. McMullen.

This all started when former Stros General Manager Gerry Hunsicker was passed over earlier this week for the Philadelphia Phillies general manager position. Mr. Hunsicker grew up in the Philadelphia area and his tenure with the Stros coincided with the club becoming one of the most successful teams in Major League Baseball over the past decade, so he was thought to be the favorite for the Phillie job. Thus, it definitely raised some eyebrows that he was passed over for the job, particularly in favor of a 68 year old.

Well, it didn't take long for the salvos to blast forth from the Stros' front office after the Phillies' announcement. As noted in this earlier post, the Chronicle's Stros beat reporter -- Jose de Jesus Ortiz -- wrote this article entitled "Hunsicker Must Prove That He's Trustworthy" in which he relates how Stros owner Drayton McLane and current Stros GM Tim Purpura became disenchanted with Hunsicker's alleged behind-the-scenes backstabbing and self-promotion in the media.

It didn't take long after that for Mr. Hunsicker to fire back with his own salvo. In this blog post, Chronicle sportswriter Richard Justice -- who has long been one of Hunsicker's media conduits and, not coincidentally, a frequent harsh critic of Stros owner McLane -- criticized the Stros' front office for its handling of the firing of a longtime Stros scout and later, in response to a reader's question, relates how Hunsicker was furious that then Director of Player Personnel Purpura misevaluated the Stros Chris Burke as having the potential to play shortstop at the Major League level. That latter barb -- as well as the bombs tossed in Mr. de Jesus Ortiz's piece on Mr. Hunsicker -- are all the more surprising because Hunsicker was supposed to have been Purpura's mentor during Mr. Hunsicker's tenure as Stros GM.

Finally, the public sniping concluded -- at least for the time being -- with Hunsicker leaving town with his tail between his legs by accepting the no. 2 position behind 28 year old Andrew Friedman in the notoriously poor Tampa Bay Devils organization, a substantial step down for a baseball executive with as successful a track record as Hunsicker. His professional demise was accentuated by the fact that he took the Devil Rays job at a time when several much more appealing general manager positions -- the Red Sox and the Dodgers, just to name two -- remain unfilled.

So, what to make of all this? Well, for one thing, despite his squeaky-clean public persona, McLane is certainly capable of getting down and dirty with the best of them when he believes that his reputation is being sullied. It also appears reasonably certain that Hunsicker did not leave with many friends in the Stros front office and that his reputation for self-promotion may have cost him dearly in terms of snaring one of the better GM positions in Major League Baseball. If that is true, then hopefully Hunsicker can dispense with that attribute and become an effective mentor to Mr. Friedman in Tampa Bay. Although Hunsicker reportedly was Purpura's mentor with the Stros, it's worth noting that Purpura was one of the least-known, up-and-coming front office executives in Major League Baseball before McLane selected him to replace Hunsicker as Stros GM. Unless Hunsicker's mentoring relationship with Friedman turns out better than his similar relationship with Purpura did, then a very talented baseball executive may soon find himself without a Major League job.

Posted by Tom at 7:41 AM | Comments (1) |

Signs of desperation at the Enron Task Force?

Already having engaged in intimidation of witnesses and dubious plea-bargaining tactics, the Enron Task Force is showing signs of becoming desperate regarding its legacy case.

As noted in this post from earlier in the week, the Enron Task Force has done a 180 in regard to its position toward Arthur Andersen and its former partners in connection with its legacy case against former Enron executives Ken Lay, Jeff Skilling and Richard Causey. After having demonized the firm, prosecuted it out of business, and alleged that its partners were co-conspirators in a number of Enron-related prosecutions, the Task Force is now embracing several former Andersen partners as prosecution witnesses in the Lay, Skilling, Causey case and justifying that reliance on the Task Force's apparently recent realization that Enron duped Andersen just like everyone else. For Andersen, the Task Force's revisionist position regarding the firm falls squarely in the "better late than never" department.

Now, this John Emshwiller/Wall Street Journal ($) article and this Chronicle/John Roper article reveal further signs of strain in the Task Force's case against Mr. Lay. Although the Task Force's filing has not yet been uploaded on the public docket of the case (the Task Force, as a part of its propaganda campaign in Enron-related prosecutions, often leaks its filings to reporters before they are filed publicly), Mr. Emshwiller reports that the Task Force filing advises the court and the parties that it intends to go into Mr. Lay's knowledge of potential losses relating to a trading scandal in the late 1980's that could have brought the much-smaller Enron down at the time. Inasmuch as the indictment against Mr. Lay contends that he tried in the latter part of 2001 to cover up Enron's growing financial problems, the Task Force is contending that Mr. Lay's alleged similar conduct in regard to the trading scandal 14 years earlier is probative evidence of his guilt. U.S. District Judge Sim Lake has not yet ruled whether he is going to allow the Task Force to go down that bunny trail during the trial.

Meanwhile, a perusal of the case docket reflects that the Lay-Skilling-Causey team is preparing to present an impressive array of expert witnesses in defense of the Task Force's amorphous allegations of wrongdoing in regard to Enron's accounting, structured finance transactions, earnings management and related matters that form the basis of the Task Force's indictment against Messrs. Lay, Skilling and Causey. On the other hand, other than an SEC representative and the Andersen partners who the Task Force demonized earlier, there is little indication from the docket on how the Task Force plans to establish its core theory that Enron's legitimate business operations were a sham that Messrs. Lay, Skilling and Causey misrepresented to the investing public.

Messrs. Lay, Skilling and Causey will never win their criminal case in the court of public opinion that has been polluted by the slanted public statements of the Task Force and the mostly one-sided mainstream media accounts of the Enron scandal. However, assuming that a fair jury panel can be found, the foregoing developments represent clear signals that these men have a much better chance of winning their case in the courtroom.

Posted by Tom at 5:38 AM | Comments (3) |

November 4, 2005

Is the Lord of Regulation angling for J&J's support?

Let's see now. Johnson & Johnson has contracted to buy medical-device maker Guidant Corporation in a deal worth nearly $24 billion. However, J&J included in the deal some fairly sophisticated provisions that allow it to walk away in the event of a material adverse effect on Guidant's financial condition. J&J has given strong indications recently that it is wanting to walk on the deal, and Guidant has responded that it does not believe an MAE exists and that it expects J&J to consummate the deal.

So, so if you're J&J, how exactly do you come up with a sure-fire material adverse effect?

Well, how about New York AG ("Attorney General" or "Aspiring Governor," take your pick) Eliot Spitzer? Yesterday, the Lord of Regulation filed a lawsuit against Guidant alleging the the company concealed from the public a design flaw in one of its surgically implanted heart defibrillators.

No word yet on where and when the J&J-sponsored "Spitzer for Governor Rally" will be held. ;^)

Posted by Tom at 8:40 AM | Comments (3) |

Piling on Arthur Andersen

It's looking as if the Texas State Board of Accountancy needs to catch up with the government's investigation into Enron. In this Chronicle article, John Roper and Purva Patel report that the Texas state accounting board is seeking disciplinary action against seven former Arthur Andersen accountants for allegedly failing to scrutinize and report financial events that led to the collapse of Enron. The state board's press release is here and a copy of the complaint is here.

But wait a minute. Hasn't the state board staff checked in with the Enron Task Force recently? The board's complaint is rather dated -- indeed, it is based on many of the same allegations that the Enron Task Force made in 2002 when it demonized Arthur Andersen and its partners and improperly prosecuted the firm out of business. But now, faced with the realization that it actually will have to attempt to prove its amorphous charges against former Enron executives Ken Lay, Jeff Skilling and Richard Causey, the Task Force has done a 180 degree turn and is contending that the Arthur Andersen partners were duped by Enron just like everyone else (sorry about the prior misunderstanding, Andersen). Wouldn't it be the ultimate irony if the former Andersen partners call as witnesses in defending themselves against the board's complaint members of the same prosecution team that prosecuted their firm out of business?

By the way, the best reflection of the absurdity of the Board's complaint is that former Andersen partner Carl Bass was included as a defendant. As anyone with even a passing understanding of the Enron case knows, Mr. Bass was a sometimes lone voice of skepticism and reason regarding aggressive accounting positions that Enron management sought to take in regard to various transactions.

Posted by Tom at 6:12 AM | Comments (0) |

Steffy on the sad case of Jamie Olis

Chronicle business columnist Loren Steffy -- who blogs over at Full Disclosure -- does not generally share my view that government has gone overboard in the post-Enron era of criminalizing merely questionable business transactions. However, when it comes to the sad case of Jamie Olis, Mr. Steffy in his column today says enough is enough:

Olis' boss, Gene Foster, and a co-worker pleaded guilty to one count of fraud in exchange for a maximum sentence of five years. Olis fought the charges, lost, and bore the burden of the entire stock loss, which resulted in a sentence almost fives times longer than what his former boss faces.

His sentence is only one year less than WorldCom's Bernie Ebbers, who oversaw the biggest accounting scam in U.S. history, a fraud of more than $11 billion.

Olis may have helped commit a crime, but it was far from Ebbersian in its proportion. After all, Olis didn't directly profit from Project Alpha. He didn't enrich himself at shareholders' expense.

The Supreme Court earlier this year ruled that the strict guidelines that Lake used are not mandatory, that judges should have latitude for judicial prudence.

That gives Lake an opportunity to restore rationality to Olis' sentence.

[snip]

A jury found Olis guilty, and for that he should pay a price. He has. Olis, who was ordered to report to prison in May 2004, has already served 18 months. Lake hasn't scheduled a hearing on a new sentence, and by the time the process is done, Olis will be closing in on two years. Lake should consider time served and set Olis free.

Justice holds a sword, but she also holds a scale. And the scale is supposed to be balanced.

Amen. And here's hoping that Judge Lake takes note that the position on market loss that the government promoted to him at Mr. Olis' previous sentencing hearing -- and that led to the imposition of the draconian 24 year sentence -- was directly contradicted by the position that the government was taking at the same time before the Supreme Court in Dura Pharmaceuticals v. Broudo (see earlier post here).

By the way, in regard to the market loss issue, Mr. Steffy quotes Clear Thinkers favorite Larry Ribstein, who has been one of the academic bloggers at the forefront of publicizing the injustice of the Olis case.

Posted by Tom at 5:36 AM | Comments (1) |

Riots spreading in suburban France

This story has been flying a big under the radar screen (at least outside the blogosphere) over the past week, but France's government is coming under increasing political pressure to find a solution for civil unrest in suburban France that has unfolded over the past week. Over the past couple of nights, rioting youths in the the Seine-Saint-Denis region north of Paris have shot at police and firemen as they battled youths who torched car dealerships, public buses and a school.

The triggering event of the rioting occured last Thursday in the northeastern Paris suburb of Clichy-sous-Bois after the accidental deaths of two teenagers who were electrocuted while hiding from police in a power substation. However, the unrest is really the outgrowth of French society's failure to integrate millions of immigrants who have come to France over the past generation, many of whom are unemployed immigrants from the Middle East and North Africa who live in poverty in low-cost, suburban housing projects. The riots are focusing attention on the differences between France's generally affluent big cities and their poor suburbs, where the North African and Muslim immigrants and their French-born children struggle with high unemployment, crime, poverty and a lack of opportunities. As with such ghetto areas anywhere, crime-ridden gangs dealing drugs and stolen goods control many of the more decrepit housing projects and are benefitting from the chaos of the current riots.

As we saw in the chaotic aftermath of Hurricane Katrina in New Orleans, the line between civil order and unrest is fragile, and not easily restored once crossed. Daniel Drezner has more along those lines in this post and related comments.

Posted by Tom at 4:31 AM | Comments (5) |

November 3, 2005

Business tidbits

I pass along the following tidbits of business information that caught my eye this morning:

The auto industry just recorded its worst October for U.S. sales in 13 years;

For most of October, the nearby price of a natural gas futures contract closed at a high of $14.34 per million British thermal units. That was more than twice what natural gas traded for at the beginning of the year. However, an Energy Information Agency inventory report last week revealed an unexpectedly large increase in natural-gas storage just as most of the U.S. was experiencing an unusually mild autumn. Accordingly, the price of a nearby natural gas contract closed yesterday at $11.60 per million BTUs, down almost 20% from last week's highs; and

Clear Thinkers favorite James Hamilton notes that, despite record profits, oil and gas companies are reinvesting a surprisingly low percentage of their profits and he is not sure why.

Posted by Tom at 8:10 AM | Comments (1) |

All about Alito

As it did with Harriett Miers, the University of Michigan Law Library has put together this top notch site that includes biographical information, downloadable opinions, and almost everything else you need to know about Supreme Court Justice nominee, Samuel A. Alito, Jr.. Check it out.

Posted by Tom at 7:25 AM | Comments (0) |

George Mitchell makes huge gift to A&M

Longtime Houston independent oil and gas entreprenuer, real estate developer and philanthropist George Mitchell announced jointly with Texas A&M University yesterday that he and his wife Cynthia are donating $35 million to A&M to help build two physics facilities at the university. Jennifer Radcliffe of the Chronicle reports on the donation, which is one of the largest in A&M history. Earlier posts on philanthropic donations of the Mitchells are here and here.

A&M is certainly appreciative of the Mitchells' generous gift, but what most Aggies want is for Mr. Mitchell to do something about the reeling Aggie football program, which Chronicle sportswriter and former Aggie John Lopez sizes up here and here. Similarly, this caustic San Antonio Express article on the A&M football situation pretty well reflects the Aggie sentiment around the Lone Star State at this particular moment.

The Aggies are currently 16.5 point underdogs in their game at Texas Tech on Saturday. Taking Tech and laying the points may be the lock bet of the year.

Posted by Tom at 6:26 AM | Comments (0) |

Ron Perelman continues to torture Morgan Stanley

You would think that hammering Morgan Stanley for $1.57 billion in damages would be enough for Ronald Perelman.

No way. This Wall Street Journal ($) article reports that Mr. Perelman has requested the same Florida state district judge who eviscerated Morgan Stanley's defense in his lawsuit to hold the investment banking firm in criminal contempt of court for allegedly lying to the court in connection with testimony over when company executives found out that certain electronic tapes at issue in the trial might have contained potentially relevant email.

Under normal circumstances, Morgan Stanley should not worry too much about Mr. Perelman's motion. Unless the contemptuous behavior takes place in the judge's presence, all the judge should be able to do is refer the matter to the local district attorney for prosecution if she concludes that Mr. Perelman has made a prima facie case of criminal contempt. Moreover, the judge should recuse herself from overseeing the criminal case because she would likely be a witness in that case.

Having said all that, the way this case has gone for Morgan Stanley, the firm would be well-advised to have bail money immediately available for use after the hearing.

Posted by Tom at 5:15 AM | Comments (0) |

The federal government's increasing equity stake in public companies

This Wall Street Journal ($) article picks up on a subject that I have previously addressed in regard to the legacy airline bankruptcies -- that is, the federal government's increasing equity stake in public companies resulting from the conversion of the Pension Benefit Guaranty Corp.'s debt to equity in the reorganized companies under their chapter 11 reorganization plans:

The U.S. government is on its way to becoming a big shareholder in the nation's airline industry and possibly in the auto industry.

The Pension Benefit Guarantee Corp., the federal agency that partially guarantees traditional pensions, recently was awarded 7% of US Airways Group Inc. by a federal bankruptcy court handling the company's Chapter 11 reorganization, according to the PBGC's recent filing with the Securities and Exchange Commission. The agency got the shares as compensation for the underfunded pension plans it assumed when the company filed for bankruptcy.

The agency is likely to get an even larger stake -- between 15% and 35% of new shares -- of UAL Corp.'s United Airlines when it emerges from Chapter 11 in February, after 38 months in court protection, according to a PBGC official. And it's likely to get sizable chunks of Northwest Airlines, Delta Air Lines and Delphi Corp. -- if, as expected, the companies ask the bankruptcy courts to dump their pension plans on the insurer.

The article relates that the PGBC's policy to date has been not to take an active role in corporate governance matters and that the agency generally assigns one of its 11 money managers (currently J.P. Morgan Chase & Co.)that invest its assets to manage individual equity holdings.

The PGBC is being forced to take these equity stakes at a time when it is experiencing a widening deficit. As of the end of 2004, the PBGC had over $62 billion in obligations and about $40 billion in assets and that deficit will widen this year Delta, Northwest and Delphi unload unfunded pension liabilities on the agency. In fact, the Congressional Budget Office -- never a bastion of conservative projections -- estimates that the deficit will more than triple over the next ten years to $86.7 billion by 2015.

Interestingly, the article puts a rather positive spin on the equity stake that the PGBC is taking in these companies by relating the government's successful 1980 Chrysler Corp bailout. In that case, the government guaranteed $1.2 billion in loans for Chrysler in return for warrants to buy 14.4 million Chrysler shares. Chrysler's turnaround resulted in the company repaying the loans three years later, Chrysler ended up buying the government's warrants at an suction for over a $300 million profit.

Unfortunately for the government, there is one big difference in the current scenario compared with the Chrysler bailout. The auto industry at least had a prior track record of being profitable. The same cannot be said of the airline industry, particularly over the past 20 years.

Posted by Tom at 4:35 AM | Comments (0) |

November 2, 2005

Thinking about the Enron legacy case

It is currently the calm before the storm that will be the trial of the legacy case of the Enron Task Force -- that is, the criminal trial of former Enron executives Ken Lay, Jeff Skilling, and Richard Causey that is scheduled to begin in mid-January, 2006.

In that connection, this Washington Post article discusses the extensive questionnaire that was recently sent to prospective jurors in the Lay-Skilling-Causey trial, which has taken on added importance because of the extensive evidence of jury pool bias against all things related to Enron that the Lay-Skilling-Causey defense team has submitted to U.S. District Judge Sim Lake. Judge Lake declined to grant the defense's motion to change the venue of the trial out of Houston, but he has supported the defense's desire to have a more extensive questionnaire than the Task Force desired.

Meanwhile, in this the Conglomerate blog post, David Zaring addresses the important question of how does one make a case as complex as the one against Messrs. Lay, Skilling and Causey understandable to a jury? The Task Force already stumbled badly on that score in the trial of Enron Broadband case, and recent indications are that the Task Force is having similar problems in the preparation of its case against Messrs. Lay, Skilling and Causey. A reflection of that is the recent change that the Task Force has taken in regard to Arthur Andersen. Not only did the Task Force previously demonize Andersen in connection with prosecuting the firm out of business, the Task Force named Andersen as a co-conspirator in connection with various Enron criminal cases. However, the Task Force is changing its tune toward Andersen in regard to the Lay-Skilling-Causey prosecution, as prosecutors now recognize that relying on the testimony of admitted criminals such as Andy Fastow and Ben Glisan may not be particularly persuasive to a jury. So, the Task Force is currently listing several former Andersen partners as prosecution witnesses and, in so doing, contending that Andersen was duped by Enron and not really a co-conspirator with Enron, after all. It remains to be seen whether the Task Force can explain to a jury why it prosecuted Andersen out of business at an earlier stage of the Enron case when it is now contending that the firm was simply duped by Enron like everyone else.

Posted by Tom at 10:13 AM | Comments (4) |

More on former Stros General Managers

Blogging is a big light today as I make some blog site upgrades, but I wanted to pass along a couple of interesting items on former Stros general managers.

In this remarkably frank article, Chronicle Stros beat reporter Jose de Jesus Ortiz uses the occasion of former Stros general manager Gerry Hunsicker losing out on the Phillies' GM job to take a serious whack at Mr. Hunsicker's credibility. Entitled "Hunsicker Must Prove That He's Trustworthy," the article relates how Stros owner Drayton McLane and current Stros GM Tim Purpura became disenchanted with Mr. Hunsicker's alleged manipulation of media accounts of various Stros transactions, including the following:

The first time I knew Hunsicker's days were numbered with the Astros was when he flirted with the New York Mets for their vacant general manager's job after the 2003 season. A report in the Newark Star-Ledger stated that Hunsicker wanted out of Houston because he had been overruled when he wanted to hire Tony Peña instead of Jimy Williams as manager after the 2001 season.

The morning that report ran, I was awoken by Astros brass furious because they believed Hunsicker was trying to take credit for discovering Peña.

For the record, Purpura, not Hunsicker, was the one pushing for Peña.

Asked about the report, Hunsicker declined to comment. I told him I was running something about it with or without his comments because folks in his front office were offended by the inference. Whether it was true or not, Astros officials distrusted Hunsicker and believed he was the biggest leak in the franchise.

Read the entire article, which is really quite biting in relation to the usual local reporting on the Stros. Meanwhile, Mr. Hunsicker's booby prize for losing out on the Phillies GM job is reportedly the Tampa Bay Devil Rays GM position, which is probably the most challenging job in Major League Baseball.

Meanwhile, take a moment to read this fascinating (and very long) Business of Baseball interview with former Stros GM and current director of baseball operations Tal Smith, who is the one common thread through the fabric of Houston's 43 years in Major League Baseball. The interview is filled with anecdotes about the Stros franchise, including the following tidbit regarding last season's failed negotiations for Carlos Beltran:

The Beltran negotiations, they really didn’t get to any meaningful dialogue until the final hour before the deadline that we faced. It’s just tough to do a deal of that magnitude in the final hour. Drayton asked on many occasions if we could go visit with Carlos in Puerto Rico—if we could talk to him. We were denied that opportunity and told that, if we did, that would foreclose any negotiation with Carlos and perhaps some others down the road. Again, when you have a situation like that, the agent and the player set ground rules of what we could do.

Some people have suggested, “Well, you should have issued an ultimatum.” That’s all well and good. That doesn’t appear to me to be the right thing to do to your fans … to just foreclose any possibility. I don’t think Scott Boras would have reacted to any ultimatum that we might have established as far as “This offer is good until December 1, or December 10….” I don’t think that would have worked. All we would have done at that point is, with absolute certainty, denied the Astros any opportunity. As it was, I’m not sure how great an opportunity we had. It didn’t work out for us. But I don’t think there’s anything, in retrospect, we could have really done other than perhaps close the doors earlier, write it off and go in another direction. We wanted to get Carlos, if at all possible, but that’s the course we chose.

My sense is that Scot Boras need not bother peddling any of his other clients with the Stros anytime soon.

Posted by Tom at 9:03 AM | Comments (5) |

November 1, 2005

Finally, some justice for Jamie Olis

The sad case of Jamie Olis has been a frequent topic on this blog as an egregious example of the injustice that has resulted from the government's increasing criminalization of business in American society. Last night, after many months of waiting, Mr. Olis finally received some relief from his ordeal.

Although the Fifth Circuit declined to overturn his conviction, the Court did in this long-awaited opinion vacated Mr. Olis' 24 year sentence and ordered U.S. District Judge Sim Lake to resentence Mr. Olis in accordance with Booker's overall standard of reasonableness, including a recalculation of the amount of loss for which Mr. Olis should truly be held responsible. Sentencing expert Doug Berman has more analysis of the Fifth Circuit's opinion here and business law expert Larry Ribstein comments here.

Writing for the Fifth Circuit panel, Judge Edith H. Jones -- who is one of the top appellate judges in the country on business issues -- zeroed in on the main flaw in Judge Lake's acceptance of the prosecution's dubious theory relating to Mr. Olis' sentencing. As noted in this previous post relating to the Enron-related Nigerian Barge trial, the prosecution in Mr. Olis' case misled Judge Lake regarding the proper method for calculating the market loss for purposes of Mr. Olis' sentencing. Indeed, at the time of Mr. Olis' sentencing, the Justice Department had already taken the position before the Supreme Court in Dura Pharmaceuticals v. Broudo that the market loss calculation method that it was using in Mr. Olis' case was not the proper method for calculating market loss.

Without noting that egregious contradiction, Judge Jones in the Olis opinion nonetheless criticizes Judge Lake's acceptance of the government's method of market loss calculation:

In this case, the district court, faced with a "cook the books" fraud, overemphasized his discretion as factfinder at the expense of economic analysis. Thus, the court elected to rely solely on the Heil testimony concerning the purchase and sale of UCRS stock as a measure of the loss caused by Olis's offense. When Heil's testimony was offered at trial to prove guilt, Olis's counsel was not placed on notice that the same evidence might later pertain to the guidelines loss calculation. For that reason, other significant extrinsic causes of the UCRS loss were not explored, much less quantified, at trial. UCRS bought most of its Dynegy holdings at the top of the market. As Olis pointed out at sentencing, however, two-thirds of the drop in Dynegy's price occurred either before the revelation of Project Alpha's problems or more than a week after the announcement of the restatement of earnings caused by Project Alpha. Taken on the court's own terms, a substantial portion of the entire loss on the UCRS investment in Dynegy, over $100 million, could not have been caused by Olis's work on Project Alpha.

During sentencing, moreover, Olis offered the expert report of a Rice University expert, Professor Bala Dharan, which explored numerous forces at work on the Dynegy stock price during the relevant periods. The court refused to consider the report, criticizing the expert's analysis of whether Olis could have "reasonably foreseen" the impact of his conduct on the stock market. As the court observed, the economist was arguably stretching his expertise into an improper legal conclusion, but his statements on this matter are separate from his economic analysis of price and market movements. Professor Dharan's report demonstrates that Dynegy stock declined during the period covering Project Alpha in tandem with the stocks of other publicly traded companies in the energy marketing and trading business. Further, Dynegy's stock was negatively affected, even before the restatement of Project Alpha's cash flow impact, by the company's failed bid to acquire the faltering Enron. These factors and others cited in the report suggested that attributing to Olis the entire stock market decline suffered by one large or multiple small shareholders of Dynegy would greatly overstate his personal criminal culpability.

Because the district court’s approach to the loss calculation did not take into account the impact of extrinsic factors on Dynegy's stock price decline, Olis is entitled to resentencing on this factor, subject to the principles just discussed.

If there has ever been a case in which the sentence should be reduced to time already served, this is the one. Stay tuned for further developments.

Posted by Tom at 7:18 AM | Comments (17) |

Criminalizing everything

George Melloan, the deputy editor, international, of The Wall Street Journal, has recently written two columns (here and here) in which he has addressed a common topic on this blog -- i.e., the increasing criminalization in American society of ordinary business practices. Following on those columns, Mr. Melloan notes in this WSJ ($) column that the equally dubious criminalization of politics that is evident in the Scooter Libby indictment is a likely precursor of an even greater threat to freedom in American society:

The prosecutorial tsunami that has swept through a land teeming with lawyers and litigants has now come lapping up on the shores of the First Amendment. Now that politics has been criminalized, can reporting on politics be far behind?

If that sounds far-fetched, think how far prosecutors and state attorneys general have managed to stretch the reach of the law, tolerated by judges and a gullible press. A huge accounting firm, Arthur Andersen, was wiped out by an indictment because it failed to uncover the Enron fraud, something accountants are ill-equipped to do. Sarbanes-Oxley makes it hazardous to manage a company or sit on a corporate board because of the new liabilities it imposes. . . And then there's Eliot Spitzer, an AG who specializes in extracting confessions to non-crimes.

The next big story will be the debate over Mr. Bush's new nominee for the Supreme Court, Appeals Court Judge Samuel Alito. Advance word is that he, like sitting Justice Antonin Scalia, is concerned about abuses of constitutional law. That won't save Scooter Libby from the ordeal he faces, but the high court is very much in need of such views.

Finally, as noted earlier here, having encouraged abuse of state power against unpopular business executives, the Bush Administration and Republican-controlled Congress are now in no position to rein in similar abuses toward the unpopular politician of the moment.

What a mess!

Posted by Tom at 6:50 AM | Comments (4) |

KPMG class action tax shelter settlement moves toward final approval

Following on this earlier post regarding the proposed settlement, U.S. District Judge Dennis Cavanaugh preliminarily approved a proposed $225 million class-action settlement by KPMG LLP and the Sidley Austin Brown & Wood LLP law firm over questionable tax shelters that KPMG promoted and sold to hundreds of wealthy clients. Here are posts over the past year or so that chronicle KPMG's multiple problems arising from its tax shelter venture.

Under the settlement, KPMG will pay about 80% of the settlement while Sidley Austin -- which had written legal opinions supporting many of the shelters -- will pick up the balance of the settlement amount. The settlement covers about 275 former KPMG tax-shelter clients. The preliminary settlement comes a couple of months after KPMG reached a $456 million settlement with the Justice Department over the same tax shelters under which KPMG avoided a criminal indictment but admitted criminal wrongdoing.

In granting preliminary approval, Judge Cavanaugh rejected objections to the settlement raised by several law firms that lead plaintiffs' firm Milberg Weiss Bershad & Schulman LLP, KPMG and Sidley Austin had engaged in collusive settlement negotiations and that Milberg should be disqualified as lead counsel because of an alleged conflict of interest involving a former client the firm previously represented in a separate 2003 lawsuit against KPMG.

Now that preliminary approval of the settlement has been obtained, Milberg Weiss will notify all members of the plaintiff class of the settlement and the hearing on final approval of the settlement, which will occur in a couple of months. It is rare for class action settlements that are preliminarily approved not to be approved on a final basis.

Posted by Tom at 3:34 AM | Comments (0) |

October 31, 2005

It's Alito

Third Circuit Judge Samuel A. Alito Jr. is President Bush's new nominee to replace retiring Supreme Court Justice Sandra Day O'Connor. Larry Ribstein provides an overview of Judge Alito's decisions in business cases, Orin Kerr believes that Judge Alito will ultimately be viewed as being quite similar to Justice Roberts and, thus, easily confirmed, and Doug Berman provides the early analysis of the nomination from a criminal justice standpoint.

Posted by Tom at 7:11 AM | Comments (3) |

John Keegan on the Dresden firebombing

John Keegan is England's foremost military historian and, for many years, was the Senior Lecturer at the Royal Military Academy at Sandhurst. His book -- The Second World War -- is arguably the best single volume book on World War II and his book The Face of Battle is essential reading for anyone seeking an understanding of the history of warfare. His latest book -- The Iraq War -- was published in 2004, and here are prior posts on Mr. Keegan's views on the Iraq War. In short, when John Keegan writes about war, it is wise to take note.

Over this past weekend, over 100,000 Germans celebrated the reopening of Dresden, Germany's beautiful Baroque church -- the Frauenkirche -- which had laid in ruins for almost 60 years as a bleak reminder of the Allied fire-bombing raids of February 1945 that killed 25,000 people and incinerated Dresden's old city. The Dresden firebombing remained largely unnoticed outside of military circles until the early 1970's when it formed the basis of Kurt Vonnegut's haunting novel, Slaughterhouse Five, which in turn formed the basis of the 1972 George Roy Hill movie of the same name.

In this Daily Telegraph op-ed, Mr. Keegan uses the occasion of the Frauenkirche celebration to review the Dresden firebombing and to observe how Allied terror bombing during World War II raises difficult issues in these times of widespread civilian terror bombing against Americans and citizens of Allied countries. As with all of Mr. Keegan's writings, the entire piece is well worth reading, and his conclusion gives you a taste of his special perspective:

In the last, remembering Dresden forces one to recognise that there is nothing nice or admirable about any war, and that victory, even a victory as desirable as that over Nazi Germany, is purchased at the cost of terrible human suffering, the suffering of the completely innocent as well as of their elders and their parents in arms. It is right to remember Dresden, but chiefly as a warning against repetition of the mass warfare that tortured Europe in the 20th century.

Posted by Tom at 6:11 AM | Comments (0) |

An interesting English tradition

As noted earlier here and here, I enjoy the British tradition of witty obituaries, which often provide a hilarious review of the failings, idiosyncracies and peccadilloes of the deceased.

In that regard, this Wall Street Journal ($) article examines the tradition of Cambridge University's King's College in regard to publishing obituaries of its alumni that, as the article puts it, reflect "an anthropological study of the eccentric ways of the British intelligentsia." For example, the Journal describes the obituary of the late novelist Simon Arthur Noel Raven, whose writing was described by some as "smut for its own sake":

At boarding school, "eventually his long-suffering headmaster had enough of his complete disregard for the school moral code and he was expelled in 1945 for what was euphemistically called 'the usual thing.'" Mr. Raven nevertheless secured admission to Cambridge, where, "although his preference was for boys and young men," he dabbled in heterosexuality and sired a child by a fellow student, the alumni report said. "He agreed to marry her to placate her family, on the understanding that he would never have to live with her."

They divorced eventually, and he paid for their son's education. "He did not always, however, give [the boy's mother] the help that she needed. Famously, she once wired him when she was desperately short of cash, saying 'Wife and baby starving send money soonest.' He characteristically replied 'Sorry no money suggest eat baby.' "

Enjoy the entire piece.

Posted by Tom at 5:23 AM | Comments (0) |

Wal-Mart's health care finance problem

One of the often overlooked historical aspects of America's health care finance crisis is that employer-based medical insurance was largely non-existent until World War II. During the war, governmental wage and price controls prompted employers to offer medical insurance as a means to attract scarce labor without violating the wage controls. Employers quickly realized that such insurance was a cheaper way to attract labor than increasing wages, so the concept of employer-based medical insurance became a standard component of many American employers' compensation plans for employees over the past generation.

Well, as this NY Times article notes, the market distortion of substituting medical insurance for direct employee compensation has generally benefitted employers, but now rising health care costs are making employer-based medical insurance more expensive than simply paying employees direct compensation. The Times article notes the following about Wal-Mart, which employs a large number of low wage earners:

The Wal-Mart work force reflects a growing fear of many employers that the people who work for them are increasingly at risk for health problems. Many of Wal-Mart's employees are obese, the company says, and a result is rapidly rising numbers of cases of diabetes or heart disease. The prevalence of these diseases among Wal-Mart employees is increasing much faster than the national average, it says.

"The low-income population generally is not as healthy and does not engage as much in preventive care," said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured. A risk that a company like Wal-Mart faces, especially when it competes with smaller retailers that offer no insurance at all, Ms. Rowland said, is attracting too many workers who want the job primarily for the health coverage.

Inasmuch as Wal-Mart pays its employees relatively low wages but provides a good employee medical insurance plan, the company is experiencing what economists call "adverse selection" -- as the value of the wage component of the Wal-Mart employee compensation package has declined relative to the value of the health insurance component, Wal-Mart is attracting an unhealthier class of workers who apply for job at Wal-Mart primarily for the generous medical insurance. Wal-Mart's management is attempting to reverse this trend by seeking to attract a healthier type of worker who is not seeking the job primarily for the medical insurance.

Nevertheless, the core of Wal-Mart's problem is the market distortion in the employee compensation system that derives from substituting employer-based medical insurance for direct compensation. Couple that market distortion with the equally misleading economic impact of having third-party insurers pay for most health care choices and you have gone a long way towards understanding the basis of America's flawed health care finance system. Alex Tabarrok has more on the issue over at Marginal Revolution.

Posted by Tom at 4:29 AM | Comments (8) |

October 30, 2005

2005 Weekly local football review

Texans 19 Browns 16.

That's a huge sigh of relief that you are hearing from the South Main area as the Texans (1-6) avoided the real possibility of a 0-16 season with their win over the equally hapless Cleveland Browns (2-5). Amazingly, the Texans were able to pull out this field goal battle with only 237 yards of total offense, including 120 yards passing on David Carr's 10 completions on 20 attempts. Let's just say that I don't think that's a prescription for another victory next week in Jacksonville against the 4-3 Jaguars.

Cowboys 34 Cardinals 13.

The Cowboys (5-3) continued to get stellar defensive play as they held the Cardinals (2-5) to just over 200 yards total offense in cruising to an easy victory. The Pokes needed a win in this one as they head into their bye week, after which they have to play three games in 11 days, including tough ones at Philadelphia against the Eagles (4-3) and at home against the Broncos (6-2).

Texas Longhorns 47 Oklahoma State 28

The 8-0 Horns fooled around for a half, but then Vince Young ran 80 yards for a touchdown on the first play of the second half and the Horns were off to the races against Okie State (3-5). The next junior varsity games for the Horns are at Waco against Baylor (4-4) and at home against Kansas (4-4). Then, it's the Horns rivalry game against A&M (5-3) on the day after Thanksgiving and hopefully a date in the Rose Bowl against USC for the national championship. Stay tuned.

Iowa State 42 Texas Aggies 14

That sinking sound you hear is coming from College Station, where the Aggies (5-3) were clobbered by an underrated Iowa State (5-3) team and now face games at 7-1 Texas Tech (the current 16.5 point line in favor of Tech is a good bet -- for Tech!), at Oklahoma (5-3), and at home against 8-0 Texas to close out the season. That 5-6 record that the Aggies are staring at is not what the Aggie faithful expected in Year III of the Coach Fran era. By the way, you can read about my experience trolling the sidelines in this game here.

UTEP 38 Rice 31.

The plucky Owls (0-7) scored three times after UTEP (6-1) turnovers in the second half and moved to the Miners' 3-yard line in the final minute after recovering on onside kick. But the Owls lost 2 yards on fourth down with a minute left and that iced the Owls' 13th straight loss. However, the Owls have a decent chance next Saturday at Dallas against 2-6 SMU, so keep your fingers crossed.

The Houston Cougars (4-3) were off this week and travel to Orlando next Saturday to play Central Florida (5-3). And, after a brief respite, Kevin Whited is back to summarizing all of the Big 12 Conference games from the past week over at PubliusTX.net.

Posted by Tom at 8:48 PM | Comments (2) |

An afternoon on the sidelines at Kyle Field

On Saturday, I spent a beautiful Texas fall afternoon on the sidelines of Kyle Field in College Station to watch the Texas A&M Aggies host the Iowa State Cyclones in a Big 12 Conference football game.

Iowa State head football coach Dan McCarney and I grew up together in Iowa City, Iowa, where we were teammates on a championship high school football team at City High in 1970. We have remained close friends over the years, and so I have tried to attend each game in Texas that Iowa State plays since Coach Mac became head coach at Iowa State in 1994, and Coach Mac always comes through with a sideline pass for me to each of the games. The following are a few photos that I took Saturday afternoon as the 10.5 point underdog Cyclones steamrolled the Aggies 42-14 in front of over 86,000 rather disheartened Aggie fans.

The Corps "Steps Out". One of many fabulous traditions at A&M on gameday is when the A&M Corps of Cadets "Steps Out" of the Corps' dorm about two blocks away from Kyle Field. Precisely one hour and 45 minutes before kick-off, a cannon blast signals that the outstanding Fightin' Aggie Marching Band is beginning to lead the various Corps squadrons out of the dorm area as they parade down a boulevard to Kyle Field. Thousands of Aggie fans stand along the parade route and cheer the Band and the Corps members as they march toward Kyle Field. When they reach Kyle Field, the band and the Corps march into the stadium before the watchful eye of visiting dignitaries on a reviewing stand, which yesterday included former President Bush and Texas Governor Rick Perry. "Step Out," the parade, and "March In" are truly among the great college gameday traditions in all of college football.

Coach Mac chats with Coach Fran. Coach Mac and Texas Aggie Coach Fran (Dennis Franchione) engage in the traditional head coach pre-game chat at mid-field as both teams go through their pre-game warmups.

Coach Mac and Coach Fran are about the same age, but Coach Mac has been coaching in the Big 12 far longer (11 seasons) than Coach Fran, who is in his third season at A&M. Inasmuch as Coach Fran and his squad are going through a tough season, he's probably passing along his troubles to Coach Mac, who has plenty of experience in enduring tough seasons. By the way, that fellow below the two coaches is fixing something on the turf rather than tying Coach Mac's shoe.

An old quarterback shows he can still throw the pigskin. One of Iowa State's associate head coaches is Terry Allen, shown here throwing pregame warmup tosses to the Iowa State receivers. Terry's family lived across the street from my family while we grew up in Iowa City, although Terry is several years younger than Coach Mac and me, so he did not play ball with us in high school. However, Terry was quite a player, and he went on to be the starting quarterback for three seasons in the late 1970's for the University of Northern Iowa, where he eventually became a successful head football coach. Terry parlayed that success into the head coaching job at the University of Kansas during the early part of this decade, but he -- like many other coaches at that football coaching graveyard -- was fired after just a few seasons. Coach Mac hired Terry immediately and he has become a key member of the Iowa State staff.

Kyle Field is a very intimidating place to play. This is a photo of one of Iowa State's first plays during the game, which prompts me to comment on what it's like on the sidelines of Kyle Field when the visiting team has the ball. To put it gently . . .

IT IS VERY LOUD!

One of the A&M traditions is the 12th Man, which means that all students and many other Aggie fans stand during the entire game and make an incredible amount of noise while the visiting team is attempting to call its signals at the line of scrimmage. The effect of this din is disconcerting, to say the least, and most teams end up relying on hand signals to their wide receivers because of their inability to hear the signals that the quarterback is calling at the line of scrimmage. As a result, more illegal procedure penalties are generated from opponents at Kyle Field than any other venue in college football.

A key play in the game. Although I did not realize it when I was taking this picture, this play turned out to be a key one during the game. With A&M trailing 14-7 late in the first half, A&M's talented quarterback Reggie McNeal is dropping back to pass on the play, but is flushed by the Iowa State defensive line. The fleet McNeal took off done the far sideline, then cut back across the field and raced 65 yards for an apparent touchdown, except for those dreaded words . . .

"There was a flag on the play."

As you can see from this photo, directly in front of McNeal, an Aggie offensive lineman is holding Iowa State defensive lineman Nick Leaders, who has beaten the Aggie lineman badly on the play. That indiscretion cost A&M a game-tying touchdown and, frankly, the Ags never recovered.

The Fightin' Aggie Marching Band lines up for its halftime performance. The Aggie Marching Band is one of the great bands in college football, and this picture shows the band lining up for their halftime performance directly under A&M's "Zone" facility that looms over Kyle Field's north end zone. When the opposing team has the ball and is near the "Zone," the noise down on the field is absolutely deafening. A&M's master facility plan projects that a similar facility will eventually be built in the south end zone of Kyle Field, which will raise the stadium's capacity to 110-115,000.

The Aggie Band specializes in precision military marching drills and patriotic music (think John Phillip Sousa on steroids). My favorites -- the theme to the movie Patton, Noble Men of Kyle and the Strategic Air Command March.

The Tuba Pivot. A favorite part of the Aggie precision marching drills is the pivot that the tuba players make while turning during the drills. You have to see the Tuba Pivot to appreciate it fully, but take it from me -- the Aggie Tuba Corps is one precision outfit!

During the days of the now defunct Southwest Conference, the Aggie Band used to come to Houston each season when the Aggie football team played either Rice or the University of Houston. During those days, the Aggie Band and the Corps of Cadets used to parade down Main Street in downtown Houston the morning of their game against either Rice or UH, and the parade was always well-attended. That's a part of Texas football culture that I miss.

The Final Score. The scoreboard tells the story as the Cyclones beat the Aggies for the first time in eight games between the two schools. Inasmuch as it's highly unusual for Iowa State to beat A&M -- and even more unusual to hammer them at Kyle Field -- Coach Mac came over to me as the final seconds on the clock were winding down to commiserate for a moment before he had to rush off at the end of the game for the midfield handshake with Coach Fran, post-game interviews and his many other responsibilities.

It was a heartwarming moment as I embraced my old friend on the sidelines and congratulated him on his first win over the Aggies until . . . the Iowa State players decided to give Coach Mac the traditional celebratory ice-water dousing at that particular moment! As we both got drenched, Coach Mac and I had a good laugh as we parted, and it was all-in-all a satisfying -- albeit wet -- post-game ride back home to The Woodlands.

Posted by Tom at 6:42 PM | Comments (3) |

October 29, 2005

Is this all you've got?

This OpinionJournal editorial does an excellent job of sizing up Special Counsel Patrick Fitzgerald's indictment (pdf here) yesterday of Vice-President Cheney's Chief of Staff, I. Lewis "Scooter" Libby:

Sometime in May 2003, or slightly before, Nicholas Kristof, a columnist for the New York Times, was informed of Joe Wilson's 2002 trip to Niger to investigate claims that Saddam Hussein had attempted to buy yellowcake there. Mr. Kristof wrote a column, and Mr. Libby began to ask around, to determine why a Democratic partisan had been sent on such a sensitive mission in the run-up to the Iraq war. He allegedly learned in the course of his inquiries that Mr. Wilson's wife worked for the CIA.

Mr. Fitzgerald alleges that Mr. Libby informed Judith Miller of the New York Times about Mr. Wilson's wife in June, but she never wrote it up. In the meantime, Mr. Wilson went public with his own account of his mission and its outcome, without reference to his wife's employment or possible involvement in his trip.

Mr. Libby also spoke to Mr. Cooper of Time about it, who did write it up, but only after Mr. Novak's column had run. In this same time period, he had a conversation with Mr. Russert, which may or may not have covered Mr. Wilson and his wife, depending on whom you believe.

So, we are left with this. Did Mr. Libby offer the truth about Mr. Wilson to Mr. Cooper "without qualifications," as Mr. Fitzgerald alleges, or did he merely confirm what Mr. Cooper had heard elsewhere? Did he, or did he not, discuss Mr. Wilson with Tim Russert at all?

So, let's review what we have here. Charges based on then innocuous discussions that occurred two years ago. Now, prosecutor Fitzgerald is pursuing a 30-year jail term and $1.25 million in fines against Mr. Libby based upon alleged inconsistencies between Mr. Libby's recollection of those discussions and those of the other participants in them.

Suffice it to say that I've seen stronger cases.

Finally, Ellen Podgor provides this good technical analysis of the perjury charges in the indictment.

Posted by Tom at 8:15 AM | Comments (8) |

October 28, 2005

Richard Smalley, R.I.P.

World-renowed Rice University chemistry, physics and astronomy professor, Richard E. Smalley, died today at the age of 62. The Chronicle's Eric Berger provides an excellent obituary of Professor Smalley, who was one of the best of Houston's numerous fine scientists. Among his numerous awards, Professor Smalley won the 1996 Nobel Prize in Chemistry.

Eric's obituary passes along a fine anecdote about Professor Smalley's Nobel award banquet that had been passed around Houston professional and business circles for years:

The chairman of Rice's board of governors at the time [that Smalley was awarded the Nobel], William Barnett, recalled Smalley agonizing over whom to give the 10 tickets he had received for the awards banquet in Sweden. Barnett said Smalley gave two to his son, Chad, who later told his father he was bringing his mom, one of Smalley's ex-wives. Smalley had three.

"I think his reaction was, 'Oh lord, now I've got to ask the other one,'" Barnett said. "The Swedes were so taken with this, the joke going around the banquet was that they were going to tell Rick, if they had only known this in advance, they would have awarded him the peace prize as well."

Posted by Tom at 4:41 PM | Comments (0) |

Protectors of the Krispy Kreme Brand

The travails of Krispy Kreme over the past couple of years have been a common subject of posts here, so it is worth noting that some Southern California-based Krispy Kreme franchisees have started a blog about the company and its problems called Protectors of the Krispy Kreme Brand (introductory post here). Gotta love those Spiderman Krispy Kreme doughnuts! ;^)

Posted by Tom at 11:16 AM | Comments (0) |

Hold on to your wallets

Almost on cue with the latest round of energy company earnings announcements, our political leaders in Washington -- both Democrats and Republicans -- signaled their intent to attempt to demonize the energy industry for political gain and, in so doing, make it more difficult for markets to respond to the current limited supplies of oil, natural gas, and refined products.

This really is utterly amazing. Sen. Bill Frist (R., Tenn.), the Senate majority leader, asked the chairmen of three Senate committees to investigate high energy prices and declared that he might support a federal anti-price gouging law.

Meanwhile, Energy Secretary Samuel W. Bodman advised a Senate committee that the Bush administration is considering taking steps to create a stockpile of refined products like gasoline, diesel and jet fuel that would require the industry to set aside stocks of a variety of fuels that could be tapped in future crises. In other words, Secretary Bodman is showing government's usual tendency to make matters worse and more expensive by buying limited supplies of oil products at their currently high price. And this policy is supposed to be a stabilizing force in the energy market?

Mr. Bodman did recommend that the energy industry increase its spending on refining to ease the capacity crunch that has contributed to the recent increase in prices for refined products. However, at almost the same time, Senate Democrats on the Senate Environment and Public Works Committee engineered a deadlock on that committee over a Republican proposal to streamline federal and state permit procedures for companies that want to build refineries or expand plants.

Finally, despite the cyclical nature of the energy business and the need for reinvestment of energy company profits into drilling and exploration for new supplies of energy, politicians are already talking about instituting a windfall profits tax on the industry to make such investment even more expensive and difficult.

Hopefully, our pocketbooks can survive all this nonsense.

Posted by Tom at 5:56 AM | Comments (4) |

Epstein on Bork's Originalism

In this previous post, former Solicitor General and unsuccessful Supreme Court nominee Robert H. Bork provided a handy shorthand description of the judicial philosophy of originalism. In a letter to Wall Street Journal's ($) editor yesterday, Richard A. Epstein -- the James Parker Hall Distinguished Service Professor of Law at the University of Chicago and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution (previous post here) -- provides an equally tidy explanation of the primary criticism of the originalist approach to interpreting the Constitution:

[Mr. Bork] is wrong to assume that his brand of originalism is the preferred form of constitutional interpretation, much less the only means to combat inherent tendency of left-wing judges to improperly expand the scope of judicial power.

First, the best modes of interpretation do not rely on an assortment of secondary texts that detract attention from the text and structure of the Constitution. Why buy into endless disputes over which newspaper said what when standard dictionaries and contemporary usage can often lead to clearer results. The best readings of the Commerce Clause take only the common usage of the term -- trade as opposed to manufacture -- without reliance on the words of a single drafter or ratifier. It was for good reason that the ratification debates were not published when the Constitution was drafted. It had to stand on its own.

Second, structural considerations often require us to go beyond the text, but in principled fashion. The Constitution prohibits a tax on imports. Chief Justice Marshall rightly extended that protection to cover taxes on importers designed to circumvent a rule intended to preserve a national market. He was right to do so without any explicit blessing from the Framers.

Finally, there is no necessary reason to think that faithful constitutional interpretation leads to an expansion of legislative power. That is not true with the Commerce Clause, nor should it be true in dealing with such matters as economic regulation or abortion. Mr. Bork is much closer to the mark on abortion in Roe v. Wade because any sensible interpretation of the police power (not found in the written Constitution) would include the protection of innocent life. But he is wrong on the 10-hour work-day in Lochner v. New York, where the police power should not be allowed to advance protectionists' economic regime.

Our Constitution is a charter for economic liberty and limited government. It contains no full-throated endorsement of popular democracy at either the federal or state level.

Thus, in matters of Constitutional interpretation, be wary of labels. A strict originalist approach that overly restricts judicial activism can lead to as much injustice as the opposite extreme. Indeed, a lack of judicial activism has been at the root of the appalling lack of judicial intervention that we have seen over the past several years as numerous judges have failed to uphold the Constitution's balance of power and rein in the executive branch's dubious criminalization of business during the post-Enron era.

Consequently, criticism of judicial activism and advocacy of strict constructionism is often merely a political front for deference to the abusive exercise of state power. For example, the Supreme Court's recent unanimous decision in the Arthur Andersen was judicial activism being used to right an injustice, albeit better late than never. On the other hand, the Supreme Court's recent decision in Kelo v. The City of New London could easily be construed as an example of originalist deference to legislative action where judidial activism was desperately needed to prevent the courts from eviserating the text and purposes of the "Public Use" Clause.

Posted by Tom at 5:21 AM | Comments (0) |

Well, at least no one outside Houston and Chicago watched

The White Sox's four-game World Series sweep over the Stros generated the lowest television ratings on record for the Series, and resulted in the Fox television network not meeting its ratings guarantees to sponsors. The World Series averaged about 17.2 million viewers and drew a record low rating of 11.1 (A rating point represents approximately 1.1 million homes), which is a 30% decline from the 25.4 million viewers and 15.8 rating that the Boston Red Sox-St. Louis Cardinals Series averaged last season.

Frankly, the numbers aren't particularly surprising. Neither the White Sox nor the Stros have a national fan base such as Fox enjoyed in last season's Series with the Red Sox. Moreover, the Stros' Roger Clemens -- who pitched a total of two innings -- was the only well-known star in the Series. Finally, comparing ratings from recent Series with those of even more than five years ago can be a bit similar to comparing apples and oranges. The increase in television entertainment choices has diluted ratings for all special programs such as the Series, reflected by the fact that the ratings for this Series were still 50% higher than the prime time average of NBC, CBS and ABC combined this season. Interestingly, Fox was still able to charge $350,000 for each 30-second commercial spot this season, which was up from $330,000 it charged last season.

Posted by Tom at 5:00 AM | Comments (1) |

October 27, 2005

Former Seitel CEO sentenced

The former CEO of Houston-based geophysical seismic company Seitel, Inc. -- 58 year old Paul Frame, Jr. -- was sentenced today in federal court to over five years in federal prison for converting $750,000 from the company to fund a settlement of a civil lawsuit filed by a former fiancee. Here are previous posts on Seitel and Mr. Frame's case, and here is the Chronicle story on the sentencing.

Posted by Tom at 1:39 PM | Comments (0) |

Unconstructive criticism

Kevin Whited over at blogHouston.net is one of the most insightful local bloggers on matters relating to football. In this post, he observes that John McClain -- the Chronicle's main beat writer on the National Football League for many years -- is a rarity among Houston media types in now suggesting that Houston Texans owner Bob McNair ought to fire General Manager Charlie Casserly along with Texans Head Coach Dom Capers for the Texans' miserable 0-6 start to the 2005 season. Kevin notes that Mr. McClain's criticism of Mr. Casserly is unusual in comparison to the normally fawning treatment that most local sports media types give to the personable and media-savvy Texans General Manager.

Kevin makes a valid point, but what I would like to know is Mr. McClain's explanation for his sudden turnabout -- as late as the pre-season this year, he was also one of the local media types who was fawning over Mr. Casserly and the Texans. For example, check out the following from Mr. McClain's July 24, 2005 column entitled "Playoffs on minds of Texans: Players to put gear for start of camp:"

For the first time in the four-year history of the franchise, the Texans enter training camp as a playoff contender.

While it probably is unfair to expect them to win the AFC South when they never have defeated Indianapolis, it is not too much for fans to expect them to contend for a wild-card berth after the Texans swept Jacksonville and Tennessee last year on the way to a 7-9 record.

This particular article is not unusual. Mr. McClain wrote dozens of similar articles over the past four years in which he breathlessly extolled the virtues of Mr. Casserly and the Texans' front office as he trumpeted the Texans' party line that the team was becoming an NFL playoff contender. Not until the Texans began this season with one of the most devastatingly bad string of performances in recent NFL memory has Mr. McClain began to make the rather obvious point that the Texans do not have enough frontline NFL-quality players and that the players that they do have are not performing well. Ergo the criticism of Mr. Casserly and Coach Capers.

However, what I want to know is this -- how has Mr. Casserly bamboozled experts such as Mr. McClain for all this time? The Texans did not become this bad overnight, although the team did show steady improvement during its first three seasons. Where is Mr. McClain's admission that he and other "experts" at the Chronicle were wrong in gobbling up Mr. Casserly's blather over the past several years that the team was being built "the right way." Rather than taking the easy way out, I would like to read an article by Mr. McClain that is based on thorough research that details the personnel choices of Mr. Casserly, compares those choices to alternatives that were available at the time of such choices, and analyzes why the choices that were made have come together to make the Texans the laughingstock of the NFL.

That type of article is much more difficult to prepare than one that simply observes that Mr. Casserly and Coach Capers ought to be fired. However, it is a much more honest approach to the Texans and one that will contribute something constructive to an otherwise desultory season for Houston's long-suffering supporters of professional football.

Posted by Tom at 7:45 AM | Comments (0) |

Reflections on the 2005 World Series

Well, for Stros fans, the end of the 2005 World Series certainly did not turn out not to be as fulfilling as the ride to get there.

Nevertheless, the past two days have been a ton of fun and filled with exciting, nailbiting baseball. This was not your typical World Series sweep as each of the four games went down to the wire and could have literally gone either way. The White Sox are the better team overall and clearly deserve to be World Champions, but the Stros certainly made them earn it.

Interestingly, the first 24 innings of the Series generated more runs than expected from these two relatively weak hitting and strong pitching clubs -- the Sox scored 17 runs and the Stros 13. However, the final innings of the Series reverted to the expected form -- the White Sox scored a total of 3 runs in their final 18 innings, yet won Games 3 and 4 because the Stros scored only 1 run on 6 hits (four singles and two doubles) in their final 19 innings. In the end, the Sox slightly superior bullpen depth and better overall hitting performance in the Series was the difference.

The atmosphere at Minute Maid Park each night was electric and quite an experience. The weather for each game was absolutely perfect, and the capacity crowds both nights stood for a good part of each tantalizing game. There is nothing quite like the concentrated excitement of attending a Major League Baseball playoff game. And, by the way, Houston's own Lyle Lovett performed in his typically classy manner during Game 4 while singing an absolutely superb rendition of "God Bless America" during the 7th inning stretch.

So, now it's on to what will be a busy and eventful off-season for the Stros. The club faces the probable retirement of two of its future Hall of Famers -- Roger Clemens and Jeff Bagwell -- while accomodating the aging veteran Craig Biggio on his quest for 3,000 hits (it will probably take him two more seasons to achieve that record). The club faces big question marks in left field, catcher, and in its starting pitching after Roy O and Andy Pettitte, but Brandon Backe put on another outstanding playoff pitching performance in Game 4 and the Stros have a host of young arms in their minor league system that are close to MLB quality at this point. So, continued solid Stros pitching appears to be a reasonable expectation.

However, the continuation of the downward trend in the Stros' overall hitting remains a knawing problem, so I am hopeful that the club's futility in that area during the World Series will prompt the Stros to be active participants in the trade and free agent markets this off-season. The Berkman-Oswalt-Ensberg nucleus is basically sound, but upgrades in hitting are probably essential if the club is going to contend for another pennant and World Series berth in 2006.

That said, this was an improbable and wonderful season for the Stros organization. I was one of the few who predicted before the season that this club could contend for the playoffs, but even an optimist such as me had no inkling that this club would battle toe-to-toe for the World Series Championship. This Stros club has a big collective heart, and this season has proven that such a heart is every bit as important as the ability it supports.

It was a great run, Stros. Thanks for letting us ride along.

Posted by Tom at 12:14 AM | Comments (9) |

October 26, 2005

"Uh, remember that hurricane damage? Never mind"

Given what I endured last night, I'm in the mood for some disaster news.

As noted in this earlier post, BP Global had been going through a difficult stretch earlier this year when Hurricane Dennis (remember that one?) apparently caused the near total collapse of its huge $1 billion Thunder Horse Drilling Platform in the Gulf of Mexico.

Well, never mind about that hurricane excuse.

BP has announced that the collapse was the result of "human error" rather than damage from the hurricane:

"After a thorough investigation, we have concluded that it was not storm-related, but was caused by a design weakness in the ballast system," Lord Browne of Madingley, BP's chief executive, said.

Translation: "Attention insurers! Grab your wallets!"

Posted by Tom at 11:00 AM | Comments (3) |

Light blogging

Blogging will be on the light side today because I didn't get home last night until quite late, . . er, make that early.

Posted by Tom at 2:04 AM | Comments (0) |

October 25, 2005

In defense of urban sprawl

Robert Bruegmann is a professor of architecture, art history and urban planning at the University of Illinois at Chicago, where he is chair of the art history department. He is also a well-regarded author on the issue of suburban growth and is the author of the recent book Sprawl: A Compact History (UChicago Press 2005). In this LA Times op-ed (free reg required), Professor Bruegmann challenges the conventional wisdom that Los Angeles is the epitome of urban sprawl run amok and that the northeastern metro areas are paragons of sound urban planning:

Los Angeles is not a particularly good example of urban sprawl. Take the part about being unplanned. The truth is that New York, Chicago and most of the older American cities had their greatest growth before there was anything resembling real public planning; the most basic American land planning tool, zoning, did not come into widespread use until the 1920s.

L.A., by contrast, was one of the country's zoning pioneers. It has had most of its growth since the 1920s, during a period when planning was already important, and particularly since World War II, when California cities have been subject to more planning than cities virtually anywhere else in the country.

Professor Bruegmann proceeds to point out that the density of the Los Angeles region has increased dramatically in the post World War II era as the density of the northeastern U.S. metro areas has plummeted, and that such increase in density has occurred during a time when Los Angelinos were becoming more automobile dependent rather than less. In fact, Professor Brudgmann notes that the growing congestion in the Los Angeles region is not so much a result of urban sprawl, but of increasing density of population coupled with too few miles of freeway per capita in L.A. compared with most other U.S. urban areas. He concludes by observing why these facts often do not make a dent in the conventional wisdom:

Of course, none of these objections to standard wisdom are likely to sway many highbrow critics of sprawl. Their desire to see L.A. as sprawl and therefore as not truly urban is based less on rational analysis than on subjective aesthetic judgments and class resentment.

But there are major problems with their position. First, there is considerable room for doubt that sprawl is necessarily the major problem that many anti-sprawl crusaders believe it to be. But, in any case, Los Angeles is not a good model of sprawl. The urban area of New York or Boston, for example, each surrounded by a huge low-density penumbra, would make a better poster child for sprawl than the dispersed but relatively dense and compact Los Angeles.

Read the entire piece. Hat tip to Peter Gordon for the link to Professor Bruegmann's op-ed.

Posted by Tom at 9:28 AM | Comments (2) |

The Frasier Lawsuit

In many respects, investment in an entertainment project is similar to investment in an oil and gas well. Often, individuals involved in putting together such a project negotiate "sweat equity" in the form of a "back-in working interest" -- i.e., an interest in the net profits of the project after payment of all expenses of creating and maintaining the project.

The agents involved in putting together the popular Paramount Pictures' television sitcom Frasier cut such a deal with Paramount and, after the show ran for 11 seasons and grossed over $1.5 billion, it looked like they had made a pretty good deal. When the agents demanded an accounting from Paramount regarding their back-in interest, Paramount responded by asserting that the show had never reached profitability and had actually lost $200 million. Lawsuit ensues, as this L.A. Times article reports.

This type of lawsuit is becoming increasingly common in Hollywood, as reflected by this earlier post about Peter Jackson's lawsuit over the Lord of the Rings movies. And you thought the oil and gas business was hard-knuckled?

Hat tip to Craig Newmark for the link to the LA Times article.

Posted by Tom at 8:05 AM | Comments (0) |

Wilma devastates Cancun

If you were thinking about a holiday vacation in the popular Mexican resorts of Cancun or Cozumel, then you better start considering other alternatives.

As predicted earlier here, reports are now confirming that Hurricane Wilma devastated the Cancun and Cozumel hotels and shopping areas that are at the heart of Mexico's tourism industry. Hotels in the area will not open for the Christmas season because of the extensive damage, and early indications are that the area will not be in a position to take on large numbers of tourists until at least Easter weekend in 2006. Marriott International Inc. closed its three resorts in Cancun until at least the end of December and the Ritz-Carlton Cancun said it was closing and not taking reservations until the New Year. The two Hyatt Regency hotels will also be closed for at least a month. Hotel damage in Quintana Roo state -- where both Cancun and Cozumel are located -- is currently estimated at $1.5 billion.

Posted by Tom at 3:38 AM | Comments (0) |

October 24, 2005

What really happened at Refco?

Those of us who have been following the Refco case are familiar with the allegations that have brought the big securities trader to its knees in bankruptcy -- Refco's former CEO, Phillip R. Bennett, hid ties to the bad debt to improve Refco's balance sheet and mislead investors. The theory of the case against Mr. Bennett is that he assumed about $430 million in bad debts of Refco -- some of which arose years ago -- that let Refco avoid reducing net income and wiping out nearly all of the company's profits for the past three years. The alleged purpose of hiding the losses was to facilitate Refco's recent IPO and an earlier deal in which Thomas H. Lee Partners LP acquired a controlling interest in Refco. For his part, Mr. Bennett has denied wrongdoing, and his lawyer has said that his client will fight the charges.

Despite the superficial allure of criminal charges against crafty businessmen, I remain skeptical of criminal cases against anyone until I truly understand them, and the post-Enron era of the government playing to the public's resentment of wealthy business executives has only reinfored my skepticism. So, I continue to look for a coherent explanation of the details behind the government's above-described theory of the case against Mr. Bennett, and this NY Times article comes closest to date of actually breaking down the transactions on which the government's indictment of Mr. Bennett is based. However, even the Times' explanation is not clear:

At the start of every quarter, Refco Capital Markets would extend loans to several hedge funds, including Liberty Corner Capital Strategies. The hedge funds would pay interest on those loans, which was recorded in Refco's financial documents and whose existence was confirmed, every quarter that it was checked, by Refco's auditor.

The next two steps were not apparent to the auditor a few days into the quarter: a loan from the hedge funds to RGHI, Mr. Bennett's company, and effectively a second loan, from Refco to RGHI. Mr. Bennett's company used the loan to repay the hedge funds, plus interest. Before the end of the quarter, the hedge funds would repay the obligation to Refco. The effect of the transaction was to convert, for bookkeeping purposes, an obligation by RGHI to Refco into an obligation by the hedge funds to Refco every time an auditor might look. But during the quarter, RGHI held the obligation to Refco.

O.K., so let's break this down:

RGHI owes money to Refco;

Refco makes loan 1 to the hedge fund;

Then, hedge fund makes loan 2 to RGHI;

Refco then makes loan 3 to RGHI;

RGHI uses the proceeds from loan 3 to pay the hedge fund for loan 2; and

Then the hedge fund uses the proceeds from the loan 2 repayment to repay loan 1 to Refco.

Got it?

There's just one big problem with the Times' explanation -- loan 3 from Refco to RGHI remains outstanding. The Times' explanation confuses repayment of loan 1 with repayment of loan 3. Consequently, based upon the Times' explanation of what occurred, Refco had a loan to RGHI -- "Mr. Bennett's company" -- that should have been reflected as a loan to an insider on the company's financial statements.

So, what again is exactly the fraud here? I await further clarification, and the original complaint against Mr. Bennett does not provide much.

By the way, Dale Oesterle, a contract law professor at Ohio State, notes in this post that Refco and Mr. Bennett's fate likely would have been far different had the company not gone public. Similarly, Larry Ribstein points out that, if Mr. Bennett really did commit a fraud at Refco, a loophole in the Sarbanes-Oxley legislation wasn't the reason he was able to do so.

Posted by Tom at 7:08 AM | Comments (4) |

Hurricane Katrina's real economic impact becoming clearer

The damage from Hurricane Katrina to the Gulf of Mexico's oil and gas production facilities has had a huge impact on national and international oil and gas markets over the past two months. However, from a regional standpoint, the biggest economic impact from Katrina has been the loss of thousands of jobs, particularly in small businesses. A couple of recent articles reporting on the latest governmental statistics and reports from lending institutions provide a clearer picture of the extent of the economic carnage.

Two NY Times articles (here and here) from last week report on the extraordinary job losses in the Gulf Coast region resulting from the hurricane and the effect that such job loss is having on cities and financial institutions in the region. Louisiana and Mississippi lost a combined total of 310,000 jobs in September, which raised their unemployment rates to a United States high of 11.5% and 9.6% respectively. These are staggering job losses for the region, and since most the losses are attributable to small businesses that were either uninsured or underinsured in regard to damage from the hurricane, the restoration of those jobs will be a painfully slow process.

Meanwhile, the double whammy of Hurricanes Katrina and Rita are expected to result in at least $1.3 billion in bad loans for major financial institutions in the Gulf Coast region battered by the storms. While most of the damage came from probably uncollectible loans to now-defunct businesses and consumers who lost their jobs as a result of the storms, the banks also lost substantial revenue from fees and interest that were waived to ease the financial pressure on storm victims.

Hibernia Corp. was the hardest hit as it reported a third-quarter loss of $58.1 million (37 cents a share) compared with year-earlier profit of $76.5 million. Hibernia reported that the two storms cost it almost $200 million in the latest quarter, including a charge of $175 million to boost loan loss reserve. Hibernia also suffered another $35 million in property damage, a quarter of which was uninsured. Similarly, Citigroup Inc., which is the largest U.S. bank by stock-market capitalization, had $3.6 billion in loans in the Gulf Coast region and the bank announced last week that it expects $375 million of those loans -- mostly consumer credit -- not to be repaid.

New Orleans and the Gulf Coast region will slowly regain a portion of its lost jobs over the next 6-12 months as the region's tourist business rebounds with the repair of convention and casino facilities. However, my sense is that a substantial portion of the jobs lost in the New Orleans area are gone forever. As a result, New Orleans business officials need to be concerned much more with promoting policies that will encourage job growth in their city than worrying about costly and unproductive (at least from a jobs standpoint) frivolities.

Posted by Tom at 5:31 AM | Comments (0) |

The economics of deferred obligations

Chronicle business columnist Loren Steffy wrote this interesting column over the weekend that includes excerpts from an old interview with business restructuring expert Steve Miller, who is currently managing the reorganization of Delphi as its CEO.

The reorganization of Delphi is considered a precursor of the almost inevitable larger reorganization of its former parent General Motors and other large American companies -- not to mention the federal government's Social Security and Medicare programs -- that are burdened with huge unfunded pension and retiree health care costs. Mr. Miller sums up the basic problem well in describing the similar problems that he confronted in one of his former reorganization projects, Bethlehem Steel:

In 1960, when [Bethlehem Steel] adopted a lot of its benefit programs, the company had 100,000 workers and about 12,000 retirees. Promising them pensions and health care benefits for life seemed, at best, a distant worry.

More than 40 years later, Bethlehem, by then in bankruptcy, had 12,000 employees and 130,000 retirees and dependents. The math no longer worked.

Read the entire article.

Posted by Tom at 5:05 AM | Comments (2) |

2005 Weekly local football review

Texas Longhorns 52 Texas Tech 17

Texas QB Vince Young didn't really have all that good a game, yet Texas (7-0) rolls over formerly undefeated Tech (6-1), anyway. The fact that Tech is arguably the second-best team in the Big 12 this season underscores just how better the Longhorns are than anyone else in the conference. The Horns now have the equivalent of junior varsity games the next three weeks against Oklahoma State, Baylor and Kansas before closing the regular season with its rivalry game against Texas A&M.

Texas Aggies 30 Kansas State 28

Although Kansas State's (4-3) program has trended downward over the past couple of seasons, this was still an important road victory for the Ags, who find themselves at 5-2 even after a disappointing first half of the season. Unfortunately for the Ags, they host a tough Iowa State (4-3) team this week, then go to Tech and Oklahoma before finishing the season at home against the Longhorns. The Ags could lose all of those games, which would not go over well in Aggieland.

Colts 38 Texans 20

Texans QB David Carr was 6 of 9 passing for 48 yards while being sacked 5 times for 42 yards in losses and scrambling for 35 yards on five carries. He also had one interception, which was returned 20 yards. Thus, out of roughly 20 pass plays called in the game, the Texans netted a total of 21 yards. On the other hand, the Texans had 133 yards on 33 running plays. The inescapable conclusion gleaned from this data is that the Texans should simply eschew the innovation of the forward pass altogether and convert to the Wishbone offense. The 0-7 Texans have a rare chance for a victory next Sunday at home against the almost equally hapless Cleveland Browns (2-4).

Seahawks 13 Cowboys 10

The Pokes (4-3) lost one like the Stros in this one by giving up 10 points in the last 40 seconds. The Cowboys really got screwed as they dominated the game defensively, but were denied a probable late touchdown that would have put the game away when the referees inexplicably picked up a defensive holding flag on a third down play near the Seattle goal line where the Seahawk defender clearly attempted to tackle Cowboy TE Jason Whitten during his route. The Big Tuna not only chewed out the officiating staff on the field after that call, but also whacked in full view of the television cameras one of his own staff members who attempted to get in his two cents during the rhubarb. Assuming that defense continues playing in such a dominate fashion, the Cowboys should be O.K. as they have their off week in between relatively easy games against Arizona and Detroit, and a tough one at Philadelphia, over the next month.

Houston Cougars 28 Mississippi State 16

Even a win over a bad Southeastern Conference team is a big step forward for the inconsistent Cougars (4-3), who are still hoping for a minor bowl bid this season. The Coogs are off this week before closing at Central Florida (4-3) and then at home against SMU, Southern Mississippi, and Rice.

Navy 41 Rice 9

The Owls (0-7) death march to a possible 0-11 season continued as a very solid Navy team -- led by its colorful coach Paul Johnson -- trampled the Owls at Rice Stadium before 12,000 friends and family members. Mike Price and UTEP get to pad their stats against the Owls next.

Posted by Tom at 3:58 AM | Comments (2) |

October 23, 2005

Longhorn football and Harriet Miers

Here's a good trivia question for your next tailgate party this football season -- What's the connection between Supreme Court nominee Harriet Miers and Texas Longhorn football?

Larry Ribstein has the story about Ms. Miers' involvement in her former firm's settlement of claims arising from its representation of former All-American Longhorn placekicker, Russell Erxleben.

Posted by Tom at 8:11 AM | Comments (0) |

October 22, 2005

The Stros' ride to the World Series

As you prepare to watch for Game 1 of the 2005 World Series tonight, take a few minutes to review the previous posts set forth below that chronicle the Stros' improbable and highly enjoyable run to the club's first World Series:

The first off-season moves, including the logic behind letting Jeff Kent go;

After nine years, Stros General Manager Gerry Hunsiker resigns and Mickey Herskowitz provides historical perspective on the Stros' GM's;

The Stros lose out on Carlos Beltran and why they were wise to let him go;

New Stros GM Tim Purpura's first big challenge;

The Stros re-sign the remarkable Roy O to a new contract;

Joe Sheehan of Baseball Prospectus dumps on the Stros at the beginning of spring training;

If you really want to appreciate the Stros, then read this;

The Stros re-sign their main raker, Lance Berkman;

2005 Stros Season Preview -- I go against the grain and predict that the Stros will contend for a playoff spot;

As of May 1st, things are about as expected as the Stros wait for Berkman to return;

Ten days later, things are not looking good;

A week later, things look even worse as Bags opts for shoulder surgery;

By the end of May, glimmers of hope because of the remarkable Rocket;

By mid-June, the Stros are streaking;

Bidg sets another record;

What a difference a year makes -- checking in with the Stros at the halfway point;

By late July, the Stros are hanging in and finishing off another impressive streak;

Morgan Ensberg's remarkable season, why Willy Taveras should not be Rookie of the Year, and Mike Lamb's tough season;

Even as late as September 5th, it's not looking good for the Stros' playoff chances, but Bidg changes the momentum with one mighty yak in Philadelphia;

Remembering former Stros owner, the late John McMullen;

The Stros enter the stretch run, close in and then Whew!

The remarkable Mr. Biggio;

A new Stros fan;

Stros and White Sox are cost-effective winners;

Stros beat the Braves in the NLDS after the longest playoff game in history;

It's not easy being a Stros fan and Houston's legacy of sports disasters;

Peaches, Baby!

The cultural aspects of baseball in Chicago;

and, last, but not least the

The 2005 World Series Preview.

Batter up!

Update: There is no joy in Mudville, but it was one heckuva ride!

Posted by Tom at 11:50 AM | Comments (0) |

Wilma devastates Cancun and Cozumel

Hurricane Wilma came ashore yesterday afternoon directly on the popular Mexican resort communities of Cozumel and Cancun as a devastating category 4 storm. Although damage reports are still skimpy because of poor communications to the area, there is high probability that both of these communities and the surrounding area will suffer catastrophic damage that in some cases will take years to rebuild. Suffice it to say that this area will not likely be in a position to accomodate tourists for an extended period of time. Jeff Masters puts the situation in perspective:

Wilma's landfall will bring enormous devastation to the 40 to 70 mile wide section of coast exposed to the intense winds of the hurricane's eyewall. A long period of calm lasting up to seven hours will accompany the passage of the slow-moving eye. During the next two days, Wilma will move very slowly over or just offshore the Yucatan. This will expose structures in the hurricane zone to very long duration hurricane force winds, likely making Wilma Mexico's most expensive hurricane disaster ever. Wilma's rains will add to the misery, reaching 20 inches or more over not just the Yucatan, but the western tip of Cuba as well.

Although the current track of the storm into Florida on Monday is still unclear, the current predictions are that it will not be a major hurricane (cat 3 or above) by the time that it makes landfall in Florida. That's good news for Florida and the U.S., but not much consolation for our friends in Mexico.

Posted by Tom at 4:50 AM | Comments (2) |

Oscar Wyatt indicted in Oil-for-Food scandal

Colorful Houston oilman Oscar Wyatt -- who was once described as a businessman who would not be afraid of dealing with the Devil himself -- was arrested yesterday morning in Houston and charged in New York with bribing Iraqi officials in a scheme to corrupt the United Nations oil-for-food program. Earlier posts on Mr. Wyatt's connection to the scandal are here and here and a copy of the indictment -- which is so poorly written as to be nearly incomprehensible -- is here. Mr. Wyatt has been released after posting bail of $2.5 million.

The indictment against Mr. Wyatt is an expansion of another federal case that was brought in April against David B. Chalmers Jr., president of Houston-based Bay Oil USA Inc. The indictment against Mr. Wyatt also names two Swiss business executives -- Cathy Miguel and Mohameed Saidji, who are accused of conspiring with Wyatt. Under the indictment, the 81 year old Mr. Wyatt faces a potential jail term of at least 60 years and the threat that the Justice Department will attempt to freeze a substantial amount of his assets.

Mr. Wyatt was a controversial supporter of Saddam Hussein and an acerbic critic of President George H.W. Bush's decision to liberate Kuwait and invade Iraq during Operation Desert Storm in 1991. The indictment alleges that Mr. Wyatt arranged for his first Iraqi oil as chairman of Coastal Corporation in 1996 under the U.N. Oil for Food Program, and that Mr. Wyatt allegedly arranged illegal payments over the next four years to front companies and bank accounts that Hussein controlled. In return for the alleged bribes, Mr. Wyatt, who was allegedly aided by the two Swiss businessmen, arranged to receive millions of barrels of oil from Iraq. Mr. Wyatt later engineered the sale of Coastal to El Paso Corporation in 2001.

Posted by Tom at 4:15 AM | Comments (2) |

October 21, 2005

A truly scary thought -- Metro morphs into real estate developer

The Chronicles Nancy Sarnoff writes in this article about the Metropolitan Transit Authority's latest venture to do something other than what it is chartered to do, which is to provide a flexible and effective mass transit system for citizens of the Houston metropolitan area:

[Metro] has selected Houston-based Transwestern Commercial Services to build [a $105 million building above the transit center on Fannin near the Medical Center], which could include condominiums, a hotel, office and retail space in the Texas Medical Center.

Metro hopes the project will increase ridership, create a neighborhood-friendly sense of place and generate revenue from its real estate assets.

"We want to do things where people can live, work and play that enhance their quality of life," said Todd Mason, vice president of real estate services for Metro.

The development plan calls for a 175-room hotel, 30 condominiums, 35,000 square feet of shops 168,000 square feet of medical office space and a 15,000-square-foot wellness center.

Transwestern and Metro will spend the next year looking for a hotel operator and tenants to fill the space.

Chip Clarke, president of Transwestern's southern region, said the project details are "fluid" and that its ultimate uses will be driven by the market.

Construction, which could take three years to complete, is expected to begin in the second half of 2006.

The article goes on to describe how Metro plans similar projects for other parts of the light rail line.

H'mm. We already know that Metro does not perform particularly well at that which it is chartered to do. In view of that, it's not a good idea for Metro to be getting into the notoriously speculative real estate development business, where it can lose even more money. Indeed, our local government already has a dubious record of boondoggles in that area. Finally, given Metro's governmental subsidy for this project, how on earth are private developers -- who risk their investment based on market conditions -- supposed to compete with such projects when they must rely on higher-cost private financing?

Consequently, count me as skeptical that this approach to spurring development along Metro's rail line makes sense. When this type of thing gets started, we're not very far from having to deal with this even bigger problem.

Posted by Tom at 7:57 AM | Comments (0) |

Stros 2005 Review: World Series Preview

"2005 World Series Preview." Sounds pretty good, doesn't it?

Well, the 2005 edition of the Fall Classic is shaping up be an interesting one. The Stros and the White Sox are two good, but certainly not great, clubs that are built around solid pitching staffs. The Stros (89-73) struggled to get into the playoffs, while the Sox (99-63) pretty much cruised for most of the season, only to falter during the final month before turning it on in the last two weeks to win their division. The Stros have run up a 7-3 playoff record while engaging in two pressure-packed series with the Braves and then the Cardinals, while the Sox are 7-1 in the playoffs after polishing off the defending World Series champion Red Sox and then the Yankee-killing Angels in surprisingly easy fashion. The Sox won 10 more games than the Stros during the regular season, but the Stros have the better record over the past four months and the hitting-challenged Stros actually hit better than the White Sox. Nevertheless, both clubs rely primarily on stellar pitching that is based upon some of the best starting pitchers in Major League Baseball. Consequently, expect a low-scoring series involving tight, well-pitched games in which runs are precious and home runs decisive.

As we all know, the Stros hitters (final statistics here) are not a strong group. The Stros' final runs created against average ("RCAA," explained here) for the 2005 regular season ended up at a -26 (12th out of the 16 National League teams), which means that the Stros scored 26 fewer runs than an average National League team would have scored during the season. The Stros rely primarily on one very good hitter -- switch-hitting Lance Berkman (35 RCAA/.411 OBA/.524 SLG/.935 OPS) -- and another hitter who has had a great season overall Morgan Ensberg (39 RCAA/.388 OBA/.557 SLG/.945 OPS), although he has tailed off during the second half of the season. Jason Lane (6/.316/.499/.815), Mike Lamb (despite his generally horrible season) (-12/.284/.419/.703), and 40 year old freak-of-nature Craig Biggio (8/.325/.468/.793) can have their moments, but the remainder of the Stros' hitters are an odd combination of young and old spray hitters, Ausmus and Burke's historic yaks in the Braves series notwithstanding.

Remarkably, the White Sox (final hitting statistics here) are an even weaker hitting team than the Stros. The Sox had a miserable -59 team RCAA, which was 10th among the 14 American League clubs and, of their regular players, only Paul Konerko (38/.375/.534/.909) and Jermaine Dye (7/.342/.438/.780) are above-average in terms of creating runs. In addition, the Sox ranked in the bottom five teams in the American League in batting average, on-base percentage, walks, and stolen base success rate. Thus, at least on paper, the matchup with the Stros' pitching staff -- fresh off mowing down two stronger offenses than the Sox can muster -- cannot be a particularly inviting prospect for the ChiSox.

Although the hitting in this series is unlikely to remind anyone of the need for steroid testing, the pitching is another matter altogether. No team can match the Stros' three frontline starters (Stros' pitching stats here). The Stros pitching staff's 97 team runs saved against average ("RSAA," explained here) was second among the 16 National League teams, and The Rocket and Andy Pettitte finished 1-2 in National League RSAA while National League Championship Series MVP Roy Oswalt finished seventh. That performance by the three primary Stros starters is one of the finest seasons by three starting pitchers on one staff in modern baseball history. With Lidge, Wheeler and Qualls all pitching well out of the bullpen, the Stros have the most formidable pitching staff of any club in the 2005 playoffs.

Nevertheless, the White Sox pitching staff overall (pitching statistics here) is even stronger than the Stros' lights out staff. The Sox team RSAA of 159 was tops in the American League, and their four starters -- RHP Jose Contreras (20 RSAA/3.61 ERA), LHP Mark Buehrle (38/3.12); RHP Jon Garland (24/3.50) and former Stros farmhand RHP Freddy Garcia (15/3.87) -- are every bit as good as the Stros because of the dilution to the Stros' starting four caused by the under-average Brandon Backe (-11/4.86).

Moreover, the Sox bullpen is equally as impressive. Bobby Jenks (8/2.75) is the most well-known, but Cliff Politte (19/2.00) may have been the most underrated reliever in MLB this season. Combined with Dustin Hermanson (16/2.04) and Neal Cotts (17/1.94), the top four White Sox relievers have a 55 RSAA this season, which is the third best total in MLB this season (behind only the Yankees and A's) for a team’s top three relievers. Thus, the White Sox have four fresh, dominant relievers on which they can rely, something that the Stros did not face in either of their series against the Braves or the Cardinals.

Thus, don't expect many runs or hitting extravaganzas in this World Series. This series is likely to be decided by small miscues, which are often unnoticeable over a long season, but are utterly unpredictable in a short series. Most of the games will likely be decided by one or two runs, and the premium on runs will make it difficult for either team to recover from small miscues in the field. Inasmuch as these two teams are remarkably similar -- weak hitting, excellent run prevention, and a heavy reliance on right-handed pitchers and hitters -- predicting a winner between them is a real shot in the dark. But as with the series against the Cardinals, I like the Stros chances in this one.

Just don't expect it to go less than seven games, and do not start celebrating until the final out in the final inning is recorded in the official scorebook.

Posted by Tom at 6:00 AM | Comments (3) |

October 20, 2005

Sociological implications of the 2005 World Series

So, it's the Stros versus the Chicago White Sox in the 2005 World Series. Houstonians know Chicago well, as the Cubs are fierce National League Central Division rivals of the Stros, most recently responsible for knocking the Stros out of a 2003 National League playoff spot on the final weekend of the regular season. We long-suffering Houstonian sports fans in general -- and Stros fans in particular -- tend to remember those things for awhile.

However, the rivalry between the Stros and the Cubs pales in comparison to the rivalry among Chicagoans between supporters of the Cubs and White Sox, a rivalry that cuts across generations and class lines. Former Chicagoan (and Cubs fan) Larry Ribstein recently passed along the following excerpt from a John Kass-Chicago Tribune article that describes the Cubs-White Sox rivalry from the perspective of a Cubs fan:

As per your offer asking Cubs fans to beg for a chance to sit with you in your seats at Sox Park: I'm absolutely astounded that you think any Cubs fan would want to sit amongst greasy pork-butchers, filthy plumbers and inebriated truck drivers watching the laughable White Sox.

Please don't get me wrong. The South Side serves a purpose. It provides a place for the lower classes to live. I am sure that cabdrivers, sewer workers and other lower-class denizens all need a place to live that is inexpensive and close to the odoriferous bars where they drink non-premium beer and lament their wasted lives.

Why would I trade an enjoyable afternoon to suffer the endless buffoonery of the White Sox? I'll tell you why: I would like the opportunity to show those crotch-scratching, tobacco-chewing malingerers (and the White Sox team as well) how a real gentleman attends a baseball game with panache and elan. If you choose me, I will show you how we do it at Wrigley Field, complete with a picnic basket and a fine Chardonnay. And being the gentleman that I am, I promise not to stare at the locals . . . not even at you. Regards from the civilized world.

That condescending view is fairly standard in the cultural divide between Sox and Cub fans, so Sox fans in Chicago are having quite a good time these days reveling in the first trip of their club to the World Series since 1959, while Cub fans deal with the perpetual disappointment of yet another underachieving season from their club. As a result, some enterprising Sox fans have prepared this "Cubs to White Sox Conversion Form" that they are delivering en masse to Cubs fans over the next few days to give them an opportunity to jump on the Sox bandwagon. The first question on the conversion form gives you an idea where it is going:

1. Please indicate the last time that you watched the Chicago Cubs win the pennant:

[ ] 1945 (please leave this completed form at the front desk of your nursing home)

[ ] Have never witnessed this event.

Update: My cousin and native Chicagoan Steve Rassenfoss passes along this Chicago Sun-Times article that reports on a demographic study that reveals shocking information for Sox fans:

You're not gonna believe this, Sox fans.

You're better educated, wealthier and more white-collar than the general public.

In fact, Sox fans are remarkably similar to Cubs fans in nearly every demographic category . . . , even down to political affiliation.

In short, you're almost identical -- gulp -- to Cubs fans.

"Almost identical to a Cubs fan"? The ultimate insult to a Sox fan!

Posted by Tom at 1:48 PM | Comments (2) |

Miers on business

Larry Ribstein notes in this post that, based upon Harriet Miers' investment track record, it may be a mistake to presume that she will be as adept on business-related issues as a Supreme Court Justice than a proven Judge such as, say, Edith Jones would be. But Professor Ribstein shares my view that we should wait to evaluate Ms. Miers' performance in the Judiciary Committee hearing before deciding whether to support her nomination, although he wryly notes:

I’m still reserving judgment until I see Miers’ performance in the Senate. But, then, I’m still expecting Ernie Banks to some day lead the Cubs in the World Series.

Gordon Smith shares Professor Ribstein's skepticism of Ms. Miers' track record on business-related issues.

Posted by Tom at 8:01 AM | Comments (0) |

Enron cases are simply different

It is standard operating procedure in white collar criminal cases for the defense attorney to advise the defendant not to make public statements prior to trial so as not to risk making a statement that the prosecution could discover and use against the defendant during the trial.

However, the Enron-related criminal cases are fundamentally different than your typical white collar criminal case -- amorphous charges, extensive and often-biased media coverage, prosecution propaganda campaigns and efforts to silence key witnesses, etc. So, in that context, it's probably not surprising that former Enron chairman and CEO Ken Lay has agreed to be the Houston Forum's speaker at lunch on December 13th (scroll down for reservation information) to talk about "the collapse that rattled Wall Street and the corridors of political power," just a month before his criminal trial with former Enron colleagues Jeff Skilling and Richard Causey begins in Houston. This Mary Flood article quotes Mr. Lay's defense counsel, Mike Ramsey, on Mr. Lay's scheduled talk: "Enron's collapse hurt the community. I think Ken owes it to the community to explain his view."

Mr. Lay's talk will likely preview his theory of defense at trial, which will concede mistakes in judgment in managing Enron, but contend that those mistakes were not criminal in nature.

Posted by Tom at 6:34 AM | Comments (0) |

Selling socially responsible ice cream

Stephen Moore is a senior economics writer for the Wall Street Journal and a member of the WSJ's editorial board. He also enjoys ice cream, and he has written this clever OpinionJournal piece about the socially-responsible nonsense that Ben & Jerry's Ice Cream spews while selling its quite good -- but unhealthy (i.e., socially irresponsible) -- ice cream. He describes a recent tour that he took of the ice cream maker's factory in Vermont:

The tour itself is a 30-minute propaganda campaign explaining why the company's founders, Ben Cohen and Jerry Greenfield, deserve the Nobel Peace Prize for their unwavering commitment to the environment and economic justice.

Meanwhile, their factory is a monument to the efficiencies of capitalism and technological progress: Several dozen giant computer-operated machines churn out hundreds of thousands of cartons a day. I half expect the massive energy-gulping freezers to be solar-paneled or powered by green-friendly windmills, but no, they use lots and lots of conventional electricity. It turns out that if you want really good ice cream, you just have to tolerate a little more global warming. That's a trade-off that I personally am willing to make.

Most of my fellow tourists are a bit on the chubby side, and a few start wheezing as we climb the half-flight of stairs to the observation area. These folks need another scoop of Cherry Garcia like a hole in the head. Although this company touts its "wholesome and natural ingredients mixed with euphoric concoctions," the truth is that Ben & Jerry's ice cream mostly contains two hazardous ingredients: fatty cream and sugar.

Herein lies a second irony: This product is probably about as good for your health as a pack of Camel cigarettes--and at least cigarettes carry the Surgeon General's warning labels. At Ben & Jerry's, the saying goes "if you can't eat a whole pint . . . in one sitting, you aren't really trying." But if you do, you might as well be injecting your arteries with Elmer's glue. And they have no qualms about marketing this dangerous product to children. If you want to know the definition of a liberal's dilemma, just wait till the trial lawyers slap Ben & Jerry's with a billion-dollar lawsuit.

Read the entire piece, then check out Larry Ribstein and Stephen Bainbridge, who give you the straight scoop that wealth maximization for equity owners is the corporate purpose that is truly socially responsible.

Posted by Tom at 5:47 AM | Comments (0) |

Wilma!

This is getting very monotonous.

Hurricane Wilma moved toward Mexico's popular Cancun resort Wednesday as an extremely dangerous category 4 storm that has already become the most intense hurricane to form in the Americas since such storms began being recorded over a century ago. The National Hurricane Center in Miami warned that Wilma would be a significant threat to Florida by the weekend and could hit the western coast of Florida as at least a category 3 storm. About the only good thing about the storm's projected path is that it is far enough south at this point that it would probably not cause much additional damage to the Katrina and Rita-ravaged Gulf of Mexico oil and gas production facilities.

Wilma is on on a curving course that will likely go through through the narrow channel between Cuba and Mexico's Yucatan Peninsula on Friday, then on a northeast track toward Florida. Wilma's confirmed pressure readings early Wednesday dropped to 882 millibars, which is the lowest minimum pressure ever measured in a hurricane in the Atlantic/Gulf region (lower pressure = stronger storm). The strongest Atlantic storm on record had been 1988's Hurricane Gilbert, which registered 888 millibars.

For you hurricane junkies, that means that Wilma is stronger than Hurricanes Andrew and Katrina ever were, and is comparable to Hurricanes Rita and Allen at their peak intensities. Including Katrina and Rita earlier this hurricane season, we have now experienced the 1st, 4th, and 6th strongest hurricanes ever recorded in the Atlantic/Gulf region. Wilma is the record-tying 12th hurricane of the season -- equaling the same number from the 1969 season -- and it is the Atlantic hurricane season's 21st named storm, which ties the record from 1933 and exhausts the list of hurricane names for this year. If there is another one, then it would be named after letters from the Greek alphabet, starting with Alpha.

As noted while covering Katrina and Rita earlier this year, my favorite sites for keeping up with hurricanes are the following:

Jeff Masters Wunderblog;

Eric Berger's SciGuy;

StormTrack; and

The National Hurricane Center.

Although there is a good chance that Wilma will weaken as it experiences wind shear and cooler Gulf waters during its approach to Florida, stay tuned. There remains a good chance that it will hit Florida as at least a cat 3 storm, which could make it the worst storm ever to hit the U.S. mainland during the month of October.

Posted by Tom at 5:04 AM | Comments (0) |

Peaches, Baby!

Roy O -- simply the best pitcher ever developed within the Houston Astros system -- brought home the bacon. The Stros are going to their first World Series.

Since moving to Houston in 1972, I've been following the Stros for the past 33 years, the last 20 as a season ticket holder. Both of my teenage sons are lifelong Houstonians who have been attending Stros games with me since they were toddlers. Immediately after Jason Lane clutched that final out, my boys and I hugged each other and laughed about our experiences over the years with the Stros as we watched the players celebrate on the Busch Stadium field.

That special moment made every one of those Stros games that I have watched during the past 33 years worth every minute.

Posted by Tom at 4:00 AM | Comments (5) |

October 19, 2005

But Mr. Bork, what do you really think about the Miers nomination?

Robert H. Bork, whose own nomination to the Supreme Court generated the verb "to bork" in American political lexicon, lays the wood to President Bush's nomination of Harriet Miers to the Supreme Court in this Opinion Journal piece, which includes these gems:

There is, to say the least, a heavy presumption that Ms. Miers, though undoubtedly possessed of many sterling qualities, is not qualified to be on the Supreme Court. It is not just that she has no known experience with constitutional law and no known opinions on judicial philosophy. It is worse than that. As president of the Texas Bar Association, she wrote columns for the association's journal. David Brooks of the New York Times examined those columns. He reports, with supporting examples, that the quality of her thought and writing demonstrates absolutely no "ability to write clearly and argue incisively."

The administration's defense of the nomination is pathetic: Ms. Miers was a bar association president (a nonqualification for anyone familiar with the bureaucratic service that leads to such presidencies); she shares Mr. Bush's judicial philosophy (which seems to consist of bromides about "strict construction" and the like); and she is, as an evangelical Christian, deeply religious. That last, along with her contributions to pro-life causes, is designed to suggest that she does not like Roe v. Wade, though it certainly does not necessarily mean that she would vote to overturn that constitutional travesty.

This George Bush, like his father, is showing himself to be indifferent, if not actively hostile, to conservative values. He appears embittered by conservative opposition to his nomination, which raises the possibility that if Ms. Miers is not confirmed, the next nominee will be even less acceptable to those asking for a restrained court. That, ironically, is the best argument for her confirmation.

Read the entire piece, which is quite devastating. By the way, Mr. Bork includes as a part of the op-ed one of the best shorthand descriptions of the judicial philosophy of originalism:

Originalism simply means that the judge must discern from the relevant materials -- debates at the Constitutional Convention, the Federalist Papers and Anti-Federalist Papers, newspaper accounts of the time, debates in the state ratifying conventions, and the like -- the principles the ratifiers understood themselves to be enacting. The remainder of the task is to apply those principles to unforeseen circumstances, a task that law performs all the time. Any philosophy that does not confine judges to the original understanding inevitably makes the Constitution the plaything of willful judges.

Posted by Tom at 6:06 AM | Comments (0) |

Continental's quarterly earnings report

Houston-based Continental Airlines announced yesterday a modest third-quarter profit despite high fuel costs, parleying lower labor costs with increased revenue from its international flights and higher fares. Nevertheless, Continental announced that it expects to post a "significant loss" for the fourth quarter and that it will lose money for the full year. With various U.S. airlines currently operating in chapter 11, it is expected that combined losses in the U.S. airline industry this year will exceed $5 billion. For its part, Continental said that it had "sufficient" cash and projected cash flows through 2006.

Talk about a tough business. Announce a quarterly profit, reiterate that the company will lose money for the year, and offer that the company might be able to stay out of the tank for another year. And that's considered a relatively rosy quarterly earnings report within the industry. So it goes in the U.S. airline industry, which is in dire need of a huge shakeout at a time when it remains difficult to put an airline out of its misery.

Posted by Tom at 5:39 AM | Comments (0) |

Income tax panel announces overhaul proposals

Income tax simplification is a recurring subject on this blog, so I took notice of this NY Times article regarding yesterday's announcement that President Bush's tax-overhaul panel had agreed to offer two alternatives to the present tax code -- one alternative that essentially streamlines the current income tax and a second, bolder alternative that would replace it with a progressive tax on consumption. Although both proposals would do away with the deduction for state and local taxes, limit the current deduction for home-mortgage interest and tube the unpopular alternative minimum tax, the two plans differ in their approach to taxing business.

Both proposals will be included in the panel's final November 1 report to the Treasury Department, and the report is expected to be the framework for legislative proposals regarding overhauling the tax code next year. The income tax that the panel approved in principle yesterday is based on the following basic framework:

Creating four income-tax brackets of 15%, 25%, 30% and 33%, which is below the current top rate of 35%;

Reducing the top corporate-tax rate to 32% from 35%, eliminating the corporate alternative minimum tax and eliminating the tax on profits from active businesses overseas so that firms could repatriate overseas profits tax-free;

Reducing the tax on capital gains to 25% of the ordinary income-tax rate, or a top rate of 8.25%, which is less than the current 15%;

Eliminating the tax on dividends;

Creating a new limit on health insurance provided tax-free by employers of about $11,000 for families, $5,000 for individuals;

Replacing the mortgage-interest deduction with a tax credit equal to 15% of mortgage interest paid, but limiting it to interest on mortgages between $172,000 and $312,000 depending on the geographic region;

Eliminating the "marriage penalty" by providing a family credit of $1,650 for singles and $3,300 for couples;

Simplifying tax breaks for savings; and

Reducing the Form 1040 tax return to 32 lines from 75.

The second, bolder alternative would fundamentally change the U.S. tax code toward an approach of taxing spending rather than income in an effort to encourage saving, investment and economic growth. For individuals, it would have two major exceptions from the other alternative -- its four tax brackets would be 15%, 25%, 30% and 35%, and it would impose a flat 15% tax on dividends, capital gains and interest.

However, the second alternative would take a very different approach in tax policy toward business, although the top corporate rate would remain at 32%. Companies would be allowed to expense all capital spending in the first year (rather than of depreciating it over time), but businesses would no longer be allowed to deduct interest payments.

As the blogosphere digests these two proposals over the next several days, I will provide links to insightful expert analysis of the proposals.

Posted by Tom at 4:44 AM | Comments (2) |

Rubbing salt in the wound

After enduring a day of painful memories of Stros previous heartbreaking playoff losses in the final game of the 1980 NLCS, the Game Six of the 1986 NLCS, and Game Seven of last season's NLCS, my old friend and former Houstonian Dr. Jim Bob Baker of Temple, Texas passes along the following on the heels of Houston's latest sporting disaster:

I was just over at the physicians' lounge at the hospital before coming back to the office to finish some things up. ESPN SportsCenter was on the TV there. As an aftermath of the Astros' loss last night, ESPN graciously also showed highlights from:

The University of Houston's loss to Joe Montana and Notre Dame in the 1979 Cotton Bowl;

The University of Houston's Phi Slamma Jamma losing to Jim Valvano and North Carolina State on a tip-in at the buzzer in the 1983 NCAA National Championship Game;

The Houston Rockets' 1997 Game Six Western Conference Final playoff loss to Utah on John Stockton's last-second 3 pointer;

The Houston Oilers' 1991 NFL playoff loss to Denver on John Elway's last minute 98 yard drive;

and last but not least:

The Oilers' 41-38 overtime loss to Buffalo in the 1993 NFL playoffs after leading at halftime 35-3.

Thanks for the memories, ESPN.

Bill Simmons also has this humorous piece on special Houston sports fiascos. And Brian Goff notes that, if you are going to pitch to Pujols in that situation at all, breaking pitches are not the way to go. Finally, it took 24 hours for lifelong Houstonian Mike Falick to gather himself sufficiently to write this post on the latest Houston sports fiasco that he has endured.

Posted by Tom at 4:00 AM | Comments (2) |

October 18, 2005

KPMG serves up more sacrificial lambs

As KPMG LLP attempts to survive as a going concern after cutting a deal with the federal government to avoid a criminal indictment in connection with its controversial tax shelter practice, the firm served up 10 additional criminal defendants for the Justice Department to indict, including the firm's former chief financial officer and its former Associate General Counsel. Here are the previous posts on the KPMG tax shelter saga.

Federal prosecutors had a federal grand jury in New York yesterday charge the 10 defendants and the nine previous ones in a superceding indictment (copy here, courtesy of the TaxProf blog) with at least 39 counts of tax evasion and a single count of conspiracy to defraud the Internal Revenue Service. Three of the defendants are also charged with obstructing government investigations, and 17 of the 19 defendants are former KPMG tax professionals.

As noted in the previous posts, the case centers on four types of allegedly fraudulent tax shelters that KPMG promoted and sold from 1996 to 2002 to about 600 wealthy individuals, generating an estimated $2.5 billion in tax savings. KPMG copped a plea bargain with the Justice Department to avoid an Arthur Andersen meltdown, agreeing to pay about a $460 million fine, admitting criminal wrongdoing, and cooperating with the prosecutors. The latest indictment is a reflection of that cooperation.

As noted in this previous post, one small problem with all of this is that no court previously has ruled that the underlying tax strategies involved in the tax shelters are illegal, although the IRS has challenged the shelters as abusive tax-avoidance schemes.

Posted by Tom at 7:18 AM | Comments (0) |

Refco tanks

As predicted here last week, Refco Inc. filed a chapter 11 case yesterday and announced late in the evening that an investment consortium led by private-equity fund J.C. Flowers & Co. LLC and Texas Pacific Group would seek Bankruptcy Court approval of a bid to buy Refco's key regulated futures-trading unit

The regulated futures business that the consortium wants is a key component of Refco. Before the run on bank with regard to Refco's business over the past week, the firm was one of the most active trading firms in the commodities and financial futures markets. Over the past week, Refco customers -- typically hedge funds, individuals and institutions -- had removed at least 20% of the assets from Refco's futures brokerage business, which previously had about $4.1 billion in customer assets under management. That's a big run on the bank in anyone's book.

Goldman Sachs is apparently all over the place with regard to current matters having to do with Refco. The brokerage firm had helped lead Refco's recent initial public offering that failed to disclose Refco's CEO's assumption of $430 million in debts to the firm, and last week had offered its services to the firm as a "pro bono" crisis adviser. J.C. Flowers -- one of the companies heading the consortium to buy Refco's regulated futures business -- is run by a former Goldman Sachs partner.

Federal prosecutors have accused Refco's former CEO, Phillip R. Bennett, of securities fraud for allegedly hiding his ties to the bad debt to improve Refco's balance sheet and mislead investors in advance of Refco's IPO this past August. The prosecutors theory of the case is that Mr. Bennett's assumption of the bad debts let Refco avoid reducing net income and wiping out nearly all of Refco's profits for the past three years, which would have killed Refco's IPO and an earlier deal in which Thomas H. Lee Partners LP acquired a controlling interest in Refco. Mr. Bennett has denied wrongdoing, and his lawyer has said that he will fight the charges.

Meanwhile, Liberty Corner Capital Strategies, the New Jersey hedge fund that was involved in the questionable transactions with Refco and Mr. Bennett, disclosed yesterday that Mayer, Brown, Rowe & Maw drafted some of the loan documents relating to the transaction. Liberty Corner's counsel asserted that Mayer Brown's involvement in the deal is one reason why Liberty Corner's management did not question the legitimacy of the arrangement.

Defense counsel for Mayer Brown, meet defense counsel for Grant Thornton.

Posted by Tom at 6:46 AM | Comments (0) |

It's not easy being a Stros fan

I get up early for eight Tuesdays in the fall and spring to help cook breakfast for a 300 member men's group at my family's church, and the kitchen crew I work with is a pretty tough crowd. So, after the Cardinals' Albert Pujols stuck the pin in the Stros' World Series balloon last night, the subject of the comments from the crew members this morning were focused on the Stros, particularly Stros Manager Phil Garner's dubious decision to pitch to Pujols -- rather than walk him -- with a two run lead and two out in the top of the ninth inning of the potential National League Championship Series clinching game:

"Of course, you have to pitch to Pujols in that situation," noted one crew member with more than a touch of sarcasm. "Sanders and Mabry (the much lesser batters who followed Pujols) could have knocked in even more runs."

"What, not pitch to the best hitter in the National League with two on, two out, a two run lead in the top of the ninth and a World Series on the line?" commented another crew member with an equal amount of sarcasm. "Hell, he was 0 for 4."

"First pitch (a swinging stike in the dirt) good. Second pitch (over the railroad track over the left field pavilion) bad."

"One good thing out of this is that Manager Garner has decided to seek some professional assistance. Word has it that he has set up an appointment today with (0-5 Houston Texans' head coach) Dom Capers."

"You know, I don't think the Texans (0-5) are going to make the playoffs this season."

Add your own comment. It's good therapy. ;^)

Posted by Tom at 6:44 AM | Comments (11) |

October 17, 2005

Does Phil Garner read Clear Thinkers?

This NY Times article from over the weekend contains the following blurb from Stros manager, Phil Garner:

Phil Garner praised the Astros' owner, Drayton McLane, for his willingness to re-sign Carlos Beltran after his scintillating 2004 postseason, but he said he thought the team was better off this season without him. The rookie Willy Taveras has emerged as a fine defensive center fielder and has performed better at the plate than expected.

"I didn't necessarily think it was a big loss," Garner said before Saturday's game. "One of my things that I feel is, if you put so much of your capital in any one player, it's going to hurt you, in my opinion. So I think it might have been a little bit of a blessing."

Did Phil read that here first?

By the way, that Taveras has performed well defensively and has hit better than expected is true, although that latter point is a bit frightening, given how bad Taveras' hitting has been.

Posted by Tom at 7:18 AM | Comments (0) |

It's a small world in auditing

As accounting firm Grant Thornton, LLP reviews its liability insurance limits in connection with its audits of Refco, a couple of interesting facts are emerging.

Turns out that Refco hired Grant Thornton in 2002 to replace Arthur Andersen as the company's auditor as Andersen was collapsing under the pressure of its criminal indictment in connection with the Enron case. Moreover, the lead partner on Grant Thornton's audits of Refco is Mark Ramler, who also had been the lead partner on Andersen's audits of Refco.

Despite that juicy grist for the plaintiffs' lawyers mill, Grant Thornton apparently discovered the questionable arrangement that has led to the current run on the bank with regard to Refco.

As noted earlier, Refco disclosed last week that its chairman and CEO, Phillip R. Bennett, assumed responsibility over time for paying Refco $430 million of uncollectible debts that Refco customers owed the company, including some debts that were incurred in the late 1990s. The ostensible purpose of the debt assumption was to allow Refco to show greater profitability by avoiding write-offs.

Mr. Bennett's obligation to Refco was allegedly hidden from Grant Thornton through a series of transactions between a Refco subsidiary and a hedge fund -- Liberty Corner Capital Strategy LLC -- that essentially allowed the Refco to rent Liberty Corner's balance sheet for use in Refco's regulatory filings. Grant Thornton apparently raised questions with Refco in late September about the arrangement during a routine quarterly review, and Refco executives then notified Grant Thornton that the company had hired its own outside advisers to investigate. That investigation resulted in Refco board meeting earlier this month at which Refco directors confronted Mr. Bennett with the Liberty Corner arrangement. Although Mr. Bennett repaid the debt after being confronted, the Refco board placed him on leave. Mr. Bennett was arrested and charged with securities fraud shortly thereafter.

By the way, it's interesting to note that the Sarbanes-Oxley legislation, which was supposed to protect investors from this sort of thing, did not deter Mr. Bennett from concocting this arrangement. Assuming that the arrangement is in fact illegal and was hidden, it is an unfortunate fact of life that people lie sometimes -- and do so pretty well -- and no amount of oversight or legislation will change that cold, hard truth about humanity.

Posted by Tom at 5:16 AM | Comments (0) |

Finessing witness intimidation

When Don Corleone wanted to intimidate someone, he would "make them an offer that they could not refuse." Taking a page from the Don's book, when the Enron Task Force wants to intimidate a favorable defense witness from testifying in an Enron-related criminal case, the Task Force simply "informs" the witness that he or she is a co-conspirator with an Enron criminal defendant and might be indicted if they assist the defense of that defendant.

That's certainly the impression one gets from this Mary Flood/Houston Chronicle article that reports on the Task Force's response to the earlier motion of former key Enron executives Kenneth Lay, Jeff Skilling, and Richard Causey to dismiss the criminal case against them because of the Task Force's misconduct in intimidating prospective defense witnesses. The Task Force apparently gave a copy of its response to Ms. Flood before they filed it on the electronic docket of the case, so a copy of the pleading is not yet available to the general public. I will post a copy when it becomes available.

According to Ms. Flood's review of the Task Force's response, the Task Force concentrates on the fact that the defendants' motion relies to a substantial degree on hearsay statements of attorneys who are respresenting the prospective defense witnesses who the Task Force has threatened. Of course, the fact that the lawyers for intimidated witnesses will only disclose such threats on a confidential basis is not particularly surprising, given the risk of Task Force retribution if the lawyers were to implicate their clients publicly.

Nevertheless, it's reasonably certain from prior testimony of two witnesses (here and here) and the Task Force's unprecedented fingering of 114 co-conspirators in the case that witness intimidation is taking place, so U.S. District Judge Sim Lake clearly has a problem confronting him and he is struggling to figure out how to deal with it.

Ms. Flood's article does note additional information about a documented incident of intimidation that was referred to in the Lay-Skilling-Causey motion, but much of the information was redacted in the motion. The incident referred to in the Lay-Skilling-Causey motion involved an email from a Task Force prosecutor to a defense attorney for a cooperating government witness in one of the Enron cases that told the lawyer for the cooperating witness to direct his co-counsel to stop talking to Mr. Skilling's lawyer or that he should "get rid" of him. The Lay-Skilling-Causey motion does not name the identity of the Task Force member who sent the email or the attorney to whom it was sent.

Ms. Flood reports that the Task Force's response provides that information. Former Enron Task Force director Andrew Weissmann sent the email to "a Washington, D.C., area lawyer for former Enron official Ken Rice." The docket of Mr. Rice's case reflects that attorney to be William Dolan, but the more interesting revelation is Mr. Dolan's co-counsel in defending Mr. Rice -- i.e., Houston-based criminal defense Dan Cogdell.

H'mm, isn't that a coincidence. Mr. Cogdell happens to be the attorney who successfully defended the only defendant in the Nigerian Barge case -- former Enron accountant Sheila Kahanek -- who was acquitted in the trial of that case. Mr. Rice is the former Enron Broadband executive who testified falsely during the trial of the Enron Broadband case after copping a plea with the Task Force in the face of an almost certain conviction on insider trading charges that are unrelated to either the Broadband case or the Lay-Skilling-Causey case. Mr. Rice -- whose plea bargain allows the Task Force to withdraw its support for a light sentence if fails to "cooperate" with the Task Force in various Enron-related criminal trials -- is expected to be a key prosecution witness in the upcoming trial of the Lay-Skilling-Causey case. Accordingly, Mr. Weissmann's email during the early stages of the Enron Broadband trial appears to be a clear attempt at least to remind -- if not outright threaten -- Rice's counsel that Rice's plea deal could be at risk unless Cogdell quit talking with Mr. Skilling's counsel. Even more telling is that Weissman's threatening email to Rice's counsel was sent almost immediately after the Enron Broadband defense had caught Rice providing false testimony on behalf of the prosecution during the Enron Broadband trial.

Thus, rather than seeking the truth of whether the defendants committed crimes at Enron, the Task Force suppresses exculpatory testimony for the defendants by fingering over a hundred alleged co-conspirators, threatens defense witnesses, and threatens a cooperating witness with breach of his plea bargain if his counsel even chats with defense counsel for Mr. Skilling. Does anyone really believe that Messrs. Lay, Skilling and Causey -- already facing a highly anti-Enron environment that the prosecution has helped fuel -- can receive a fair trial under these circumstances? And is this really the way that we want our Justice Department to be operating?

Posted by Tom at 4:15 AM | Comments (0) |

2005 Weekly local football review

Texas Longhorns 42 Colorado 17

Vince Young prevents the Horns (6-0) from having a post-OU letdown as the Horns cruise over what probably is the best Big 12 North team. The win sets up what will certainly be one of the most entertaining games of the Big 12 season next Saturday in Austin as the Horns host 10th-ranked Texas Tech, which is also 6-0. My sense is that Horns' Defensive Coordinator Gene Chizik is licking his chops at the opportunity to unleash the Horns' defensive unit against Tech's idiosyncratic pass-happy offense, but this one should be fun.

Seahawks 42 Texans 10

So, who do you think the Texans should take as the first pick in the 2006 NFL Draft? At this point, it's inconceivable to me that the Texans could win a game this season absent the other team simply laying down and letting them do so. And then the Texans might trip and screw it up, anyway. The team simply does not have enough NFL-quality players, and Head Coach Dom Capers has clearly lost the team -- the Texans gave up 320 rushing yards in an NFL game, had 13 penalties for 95 yards, and the offensive line couldn't even line up without a penalty during the first quarter! Accordingly, Texans owner Bob McNair is facing the unsettling prospect of cleaning house in his football operation -- from General Manager Charlie Casserly on down -- less than four years after the franchise played its first game. Ugh.

Cowboys 16 Giants 13

What a strange game. The Cowboys (4-2) committed four turnovers, missed two field-goal attempts and allowed a tying touchdown with 19 seconds left in regulation. Nevertheless, the Pokes won the toss in overtime, and calmly drove down the field for a 45-yard Jose Cortez field goal for the victory.

"I feel pretty fortunate," Cowboys coach Bill Parcells remarked after the game, in the understatement of the NFL season so far. Much to my surprise, the resilient Pokes are remaining in playoff contention, although they face a tough game next Sunday against the high-powered Seahawks at Seattle.

Texas Aggies 62 Oklahoma State 23

Ags QB Reggie McNeal and freshman RB Jovorskie Lane ran roughshod (almost 300 yards between them) in leading the Ags (4-2) over an inept Oklahoma State team. After three weeks of uninspiring performances, the performance against even a weak opponent was a relief for Aggie faithful, but the calm may be short-lived. The Ags travel to play a hungry Kansas State team next week.

Memphis 35 Houston Cougars 20

In a game that was closer than the final score indicates, the Coogs (3-3) gift-wrapped this one for Memphis as they lost two fumbles in the end zone and missed a 21-yard field goal, all in the second half. The Coogs travel to take on SEC opponent Mississippi State next weekend.

Tulsa 41 Rice 21

After rearranging deck chairs on the Titanic by reassigning his defensive coordintor, embattled Rice head coach Ken Hatfield saw his Owls endure their fifth straight defeat. A rugged Navy team visits Rice Stadium next Saturday, so things don't get any easier anytime soon for the overmatched Owls.

Posted by Tom at 4:00 AM | Comments (5) |

October 16, 2005

Whew!

Once again, the Stros are within a game of the first World Series in franchise history.

I take back everything I said about Wily Taveras, who in a reserve role scored the winning run and made a clutch catch on Tal's Hill to close out the top of the eighth.

Adam Everett is simply the smoothest shortstop ever to wear a Stros uniform, and Eric Bruntlett can flat out trigger a double-play.

And Brandon Backe -- while a below-average National League starting pitcher -- has a far above-average heart.

By the way, the Stros have now won three out of four games in the NLCS by scoring a total of 13 runs. After scoring five runs in the first five innings of the NLCS, the Cardinals have scored a total of five runs over the past 30 innings.

Posted by Tom at 7:29 PM | Comments (4) |

Southwest, you're welcome here

This NY Sunday Times article provides a good overview of the challenges that Southwest Airlines faces in the rough and tumble airline business as its fuel hedging strategy (noted in earlier posts here and here) fades and it faces the prospect of dealing with the higher fuel prices that its less-liquid competition has been dealing with over the past year and a half.

The analysis of Southwest's business prospects is interesting, but even more so is the blurb at the end of the article that Dallas, Southwest's home base, is not being particularly supportive in Southwest's effort to have Congress repeal the Wright Amendment (earlier posts here, here and here), which restricts Southwest's routes in and out of its Dallas Love Field hub. The article notes that, if the Wright Amendment is not repealed, it makes sense for Southwest to look for a new corporate home where their business is growing as opposed to the restricted nature of its current Dallas operation.

Mayor White, get on this one -- Southwest Airlines in Houston is a natural fit.

Posted by Tom at 3:01 PM | Comments (0) |

Help me understand this

Daniel L. Gordon, Merrill Lynch's former chief energy trader, was sentenced Friday to 3 1/2 years in prison after admitting that he had stolen $43 million from the brokerage firm. Although the prosecution was only requesting a couple of years in the pokey, the judge decided that the longer sentence was called for in light of the nature and size of the theft.

I'm all right with that. But how on earth does one reconcile that sentence with the comparable sentences handed down to these two (here and here) former Merrill Lynch executives, neither of whom profited a lick from the transaction that is the basis of their alleged crime?

And when you get done trying to figure that one out, try reconciling Mr. Gordon's three year sentence with the 24 year sentence that is being endured by Jamie Olis, who also did not receive a dime from the transaction that is the basis of his alleged crime.

Let's see. Embezzle $43 million and, if you get caught, cop a plea and serve 3 1/2 years. Or, do your job, don't embezzle a cent, defend your innocence against criminal charges even when your employer serves you up as a sacrificial lamb so that the employer can avoid criminal charges, and then endure either as long, or much longer, a sentence if you are convicted.

H'mm. Doesn't seem like much of a choice to me. Something is seriously out of whack here.

Posted by Tom at 2:16 PM | Comments (3) |

October 15, 2005

Interesting conversation about the Stros today

While riding to the Stros-Cardinals Game 3 of the National League Championship Series today, one of my sons asked whether I thought that Stros manager Phil Garner would play red-hot Chris Burke, who has continued to hit well after his walk-off yak last week to win the National League Division Series over the Braves.

"No," I said. "He'll probably play Lamb at first base today because he hits (St. Louis pitcher Matt) Morris well. That means Berkman moves to left field and Burke sits. What Garner should do is put Burke in centerfield and bench Taveras, who is a marginal player. But he will never do that because everyone thinks Taveras is good, which he is not."

So, what does Phil Garner do? He starts Burke in centerfield in place of Taveras.

Stros win a 4-3 nailbiter to take a 2-1 lead in the National League Championship Series against the Cards.

Posted by Tom at 9:14 PM | Comments (3) |

October 14, 2005

Interesting Stros' stat of the day

With his two shutout innings in relief of Roy O during Game 2 of the National League Championship Series last night, Stros closer Brad Lidge -- counting the past two NLCS -- has not allowed a run to the Cardinals in almost 30 innings over the past two years.

Here's hoping that the Cardinal players are thinking about that this weekend while trying to hit that nasty slider.

Posted by Tom at 12:15 PM | Comments (0) |

A couple of good ones

A couple of good ones to pass along to friends as we move on toward the weekend. First, from Letterman:

"We've had so much rain here this week. Do you realize that we are this close to being ignored by FEMA!"

Then, from Leno on the Minnesota Vikings players' recent Lake Minnetonka escapade:

"What are they, 1-3? That's the only offensive thing they've done all season."

Posted by Tom at 8:03 AM | Comments (0) |

Exploring home run hitting

As Roy O brings the Stros home from St. Louis in a 1-1 tie in the National League Championship Series, Art De Vany, Professor Emeritus of Economics at the University of California, Irvine, provides this thought-provoking paper (pdf) in which he debunks the popular theory (of which I have never been comfortable) that MLB sluggers' taking of muscle-enhancing steroids were the primary reason that several old home-run records were broken over the past decade. As Professor De Vany notes here and here:

The latest version of my paper, "Has Home Run Hitting Changed in Major League Baseball" is now up.

I take up the matter of steroids more directly and also such possible influences as "hotter" baseballs, altered ball parks, smaller strike zone and find them all to be lacking. They do not stand up to verifiable tests or statistics. And they shouldn't because no explanation is required. There has been no increase in MLB home run hitting. Three home run hitting geniuses appeared in a brief time span and will soon be gone. Enjoy them and don't look for explanations when none are required. The law of home runs and extreme human accomplishment that I develop tell us that we never know when this kind of genius will appear, only that it will be rare and intermittent.

Posted by Tom at 7:14 AM | Comments (4) |

"Mom, look what I found while playing down at the bayou!"

Among the interesting aspects about living in the Houston area are the interesting things that one can find near one of the area's many bayous in residential areas within or near Houston's inner loop:

A contractor hired by the Texas Parks & Wildlife Department captured a 9-foot-long, 275-pound male alligator Thursday near Greens Bayou just outside Houston.

"He was removed without incident," said Capt. Albert Lynch, a state game warden in Harris County, "but as many alligators as I've moved over the years, they usually do put up quite a fight."

The alligator was caught right off Interstate 10 near the intersection of Normandy, in a flood-detention canal near Greens Bayou, . . .

Posted by Tom at 6:28 AM | Comments (0) |

Refco's Enronesque experience

As noted in this earlier post, an old fashioned run on the bank resulting from a lack of trust in the marketplace -- as opposed to losses attributable to a relatively small number of shady business deals -- is what really caused the demise of Enron. The revelations over the past week relating to Refco, Inc. -- the largest independent futures-brokerage firm in the U.S. -- has generated a similar lack of trust in the marketplace that has thrown Refco into its own Enronesque experience.

Although no where near the size of Enron, Refco is still a pretty darn big outfit. It has over $4 billion in approximately 200,000 customer accounts, and Refco's futures-brokerage business is as big as the derivatives desks of most major Wall Street firms. The company is well-known for trading commodities, currencies, bonds and derivatives transactions with a wide-range of trading partners and counterparties, including hedge funds and customers attempting to hedge risk. Nevertheless, Refco -- as with many such trading firms -- is highly-leveraged, as its most recent public filings reflect about $75 billion in assets and a roughly equal amount in liabilities.

Refco's problems began this past Monday when the company put CEO Phillip R. Bennett on indefinite leave after discovering that Summit, N.J. hedge fund, Liberty Corner Capital Strategy helped Mr. Bennettt cover up that he owed Refco $430 million. Mr. Bennett apparently owed the debt to Refco personally, but periodically had arranged for Liberty Corner to confirm the $430 million debt as its own so that Refco could reflect the same on its balance sheet for reporting purposes at the end of several of quarters. Federal prosecutors promptly arrested Mr. Bennett and charged him with fraud in connection with the firm's IPO.

Although the details of the arrangement remain hazy, for its part, Liberty Corner is contending that it believed that it was simply borrowing from one Refco subsidiary and lending to another Refco sub, and not lending to an entity that Mr. Bennett secretly controlled, as the indictment of Mr. Bennett alleges. For example, one transaction described in the indictment alleges that a Refco subsidiary Refco Capital Markets loaned $335 million to Liberty Corner, which was to be repaid two weeks later just after the end of Refco's fiscal year. At the same time, Liberty Corner loaned the same amount to Refco Group Holdings Inc., which Mr. Bennett controlled, for the same two-week period at a slightly higher interest rate. Thus, Liberty Corner made an estimated profit of roughly $100,000 on the deal, which apparently was repeated on a number of occasions.

Yesterday, Refco's crisis deepened as the company shut down one of its key units and the New York Stock Exchange indefinitely halted trading in its stock. Although Refco contends that its core regulated futures trading business remains on solid financial footing, former trading partners and lenders of the firm are fleeing in droves. Inasmuch as Refco relies heavily on borrowed funds to participate in billions of dollars in transactions, even the trading partners and lenders who are hanging in with the company are demanding greater financial assurances before doing deals, which simply diminishes Refco's ability to sustain profitability all the more.

Refco shares -- which have decreased in value by over 60% just since the week began -- were at $7.90 when the NYSE halted trading. In the meantime, rating agency Standard & Poor's downgraded Refco's long-term counterparty credit rating further into junk status as Refco's junk-rated bonds were quoted as low as 30 cents on the dollar -- a price level associated with distressed companies -- and its syndicated bank loans were quoted in the 60s. That does not go over well with institutions that invested in Refco's debt at par (i.e., 100) or close to that price.

Refco's board of directors attempted to place a finger in the leaking dike yesterday by hiring former Securities and Exchange Commission Chairman Arthur Levitt and former U.S. Comptroller of the Currency Eugene A. Ludwig to advise its board. However, even with that move, absent a white knight buyer emerging -- such as private-equity firm Thomas H. Lee Partners LP (owner of a 38% stake in Refco) -- the question increasingly is not whether Refco can avoid filing bankruptcy, but when it is going to file.

Interestingly, one of the lenders that apparently has flown the coop on Refco is American International Group, which had its own Enronesque experience earlier this year.

Finally, the litigation buzzards are circling Refco's auditor, Grant Thornton LLP. The firm did not catch Mr. Bennett's alleged scheme with Liberty Corner, although it appears that Liberty Corner advised the auditors that it owed the debts in response to audit confirmation requests that the firm sent out during its audits of Refco. Nevertheless, the Public Company Accounting Oversight Board has already opened an inquiry into Grant Thornton's audits of Refco.

Welcome to the big leagues of risk relating to audits, Grant Thornton.

Posted by Tom at 4:36 AM | Comments (0) |

October 13, 2005

All about Miers

Here are a couple of sites that provide comprehensive information regarding President Bush's nomination of Harriet Miers to the Supreme Court:

This University of Michigan Law Library site is a good resource for background materials on Ms. Miers (hat tip to Tom Mighell for the link);

and

This Legacy Network site that provides a comprehensive outline of, and background materials on, the pro and con arguments in regard to the Miers nomination (hat tip to Gordon Wood for the link).

Better, I think, to focus one's evaluation of the nomination based on information gleaned from these resources than this type of thing.

Posted by Tom at 8:32 AM | Comments (0) |

Criminal case against former Duke Energy traders goes to trial

It's not as sexy as some of the Enron-related criminal trials, but the trial of two former Duke Energy natural gas traders began in Houston federal court yesterday.

Former Duke traders Timothy Kramer and Todd Reid face racketeering, conspiracy, wire and mail fraud, money laundering and falsifying corporate books charges in connection with an alleged scheme to book phony electricity and natural-gas trades to boost trading volumes and inflate profits in a trading book that was the basis of their annual bonuses (you can download a copy of the indictment here). A third former Duke Energy trader defendant -- Brian Lavielle -- previously copped a plea and will presumably testify against Messrs. Kramer and Reid during the trial.

By the way, a couple of seasoned veterans who were involved in prior Enron-related criminal trials are representing the defendants in this case. Jack Zimmermann, who represented Kevin Howard during the recent Enron Broadband trial, is representing Mr. Kramer and Tom Hagemann, who represented Daniel Bayly in the Nigerian Barge trial, represents Mr. Reid.

This is one of the first criminal cases of which I am aware in which senior-level executives have been accused of devising schemes to generate profits in a trading book by using "mark-to-market" accounting in calculating bonuses, on one hand, and entering losses in an "accrual book" that had no bearing on bonuses, on the other. Duke Energy and many other energy traders previously used mark-to-market accounting to record profit and loss for energy contracts that might not settle for years into the future. However, the mark-to-market accounting method has come under intense scrutiny since the demise of Enron Corp. in late 2001 because of the latitude that the method allows in recording profitable results in trading operations. Consequently, if the defense can make this a trial over the advisability of using mark-to-market accounting, then my sense is that the defendants have a decent chance of acquittal. Stay tuned.

Posted by Tom at 6:25 AM | Comments (4) |

The Lord of Regulation stumbles

Well, Eliot Spitzer has had better days at the office than yesterday.

First, Mr. Spitzer finally chose not to retry (persecute ?) former Bank of America Corp. broker Theodore Sihpol III, who was acquitted on 29 of 34 criminal charges relating to alleged improper trading of mutual funds in June and settled related civil charges with the Securities and Exchange Commission yesterday. The Lord of Regulation had announced a short time ago that that he planned to retry Mr. Sihpol on the charges. Here are the earlier posts on the Sihpol case.

In announcing the dismissal of the remaining charges against Mr. Sihpol, Mr. Spitzer's office stated that the prosecution was no longer necessary because Mr. Spitzer was satisfied with terms of the SEC settlement and Mr. Sihpol's statement in court relating to the charges. In his deal with the SEC, Mr. Sihpol agreed to pay $200,000 and be banned from the securities business for five years without admitting or denying wrongdoing. In state court, where the criminal charges were dismissed, Mr. Sihpol said: "I now recognize and regret that my conduct helped give Canary Capital an unfair trading advantage over other Bank of America mutual-fund shareholders."

Mr. Spitzer and the SEC had alleged that Mr. Sihpol played a key role in allowing hedge fund Canary Capital Partners to receive same-day pricing of fund shares on trades made after the deadline of 4 p.m. Eastern time. Mr. Spitzer thought he had a layup in prosecuting the relatively young Mr. Sihpol, in part because of recorded telephone conversations between Mr. Sihpol and Canary traders that showed that Mr. Sihpol knew about the late trading and the testimony of two key Canary executives against him. Those Canary witnesses had previously bartered their testimony against Mr. Sihpol for a deal with Mr. Spitzer in which they avoided criminal prosecution and paid a fine without admitting or denying wrongdoing.

But Mr. Spitzer has always been more about bludgeoning corporate defendants into coughing up money to avoid the courtroom than actually proving anything in the courtroom. During Mr. Sihpol's trial, Mr. Spitzer's case unraveled quickly as Mr. Sihpol's lawyers pointed out that Mr. Sihpol did not believe that the late-trading was improper and that his superiors at Bank of America -- which had also kowtowed to Mr. Spitzer in a previous settlement -- knew about it.

Although Mr. Spitzer has promised to "continue to vigorously defend the interests of investors," (and to use the publicity in doing so to promote his political campaigns), some targets are becoming more willing to fight back. Last month, J. & W. Seligman & Co. sued Mr. Spitzer and alleged that he exceeded his authority by launching an investigation into the supposedly excessive advisory fees that the firm charges its mutual fund customers. The investigation began when Seligman refused to agree to Mr. Spitzer's terms (extortion?) for settling his allegations that the firm allowed improper trading in its mutual funds.

Meanwhile, in another courtroom in Manhattan yesterday, Mr. Spitzer was dealt another embarrassing blow by U.S. District Judge Sidney Stein who thankfully barred Spitzer's office from issuing subpoenas or bringing enforcement actions in his effort to damage the sub-prime mortgage market under the guise of investigating possible racial discrimination in residential-lending practices at national banks.

The Office of the Comptroller of the Currency and the Clearing House Association, a commercial-banking group, had sued Mr. Spitzer earlier this year, alleging that his investigation infringed on the OCC's regulatory role over national banks. Judge Stein has been sympathetic to the OCC's lawsuit and yesterday ordered Mr. Spitzer's office to cease and desist its transparently political investigation into "discriminatory" sub-prime mortgage lending. In so doing, Judge Stein permanently barred Mr. Spitzer from subpoenaing documents from, or bringing enforcement actions against, national banks with regard to his investigation (campaign commercials?).

This ruling is particularly satisfying in that it halts Mr. Spitzer from pursuing a disingenuous political agenda that hurts a market that helps many of the voters that he is attempting to attract. Over the years, the sub-prime mortgage market has developed as national banks have gotten better at pricing risk-based loans. Thus, people who would not be creditworthy for conventional mortgages are now able to get a home loan, although at a higher price that reflects the greater risk of loaning money to folks who do not have the credit to buy a conventional mortgage. A significant number of sub-prime loans are made to members of minority groups, but without such risk-based pricing, the members of those groups with bad credit would never have received a mortgage in the first place. So, while cloaking his investigation in the veneer of fighting racial discrimination to play up to voters from minority groups, Mr. Spitzer's probe into sub-prime lending practices is really just a front for buying cheap campaign publicity at the expense of a market that helps the very voters he is attempting to attract.

Given how most entities cower at the thought of doing battle with Mr. Spitzer in the courtroom, the OCC's decision to stand up and pin back the Lord of Regulation's ears back -- and preserve a valuable market in the meantime -- is refreshing.

Posted by Tom at 4:33 AM | Comments (0) |

October 12, 2005

Miers nomination = the Peter Principle?

Although not particularly impressed by the nomination of Harriet Miers to the Supreme Court, I decided to wait to evaluate her performance during the Judiciary Committee hearings before finally deciding whether to support or not support her nomination (as if anyone cares what I think, anyway!) ;^).

However, several bloggers are doing a good job discussing the implications of the nomination, particularly Stephen Bainbridge and William Dyer. Most of the debate from such responsible bloggers is well-reasoned and above-board, but David Frum weighed in a couple of days ago (see post "What the Insiders are Saying") with a post based on alleged well-placed confidential sources who contend that the Miers nomination is the product of the Peter Principle.

Welcome to the big leagues of petty politics, Harriet.

Posted by Tom at 8:36 AM | Comments (1) |

Behind the scenes report on winning the Scrushy trial

This Criminal Crime Reporter article reports on the talk that one of Richard Scrushy's attorneys -- Jim Jenkins of Atlanta, Ga. -- gave at the at the recent National Association of Criminal Defense Lawyers - Georgetown University White Collar Crime conference. The article provides a fascinating glimpse of the behind-the-scenes story of how the Scrushy defense team developed and implemented its defense of Mr. Scrushy against the government's charges. Previous posts on the Scrushy case may be reviewed here, here, here and here.

Hat tip to Ellen Podgor for the link to the piece on Mr. Jenkins' talk, which she notes was "the most popular event" at the conference. I can see why, as the article relates numerous solid observations regarding defending a complex business case, the most important of which is to communicate with integrity a simple and straightforward theory of the case to the jury, and to remind the jury of that theory throughout the trial. Cases such as the Scrushy case are nearly impossible to win in the court of public opinion, but -- even with the overwhelming odds in favor of the prosecution in such cases -- they can be won in the courtroom.

Posted by Tom at 7:44 AM | Comments (0) |

More on criminalizing risk-taking

Robert Weisberg is Edwin E. Huddleson, Jr. Professor of Law and director of the Criminal Justice Center at Stanford University, where he teaches a course on white collar crime with David Mills, who is a senior lecturer there. In this Wall Street Journal ($) op-ed, Messrs. Weisberg and Mills dissect the Justice Department's indictment against eight former KPMG partners for their involvement in advising and promoting allegedly illegal tax shelters for clients of the firm. Messrs. Weisberg and Mills point out that there is just one small problem with the indictment:

In the months leading up to it (and the now-rumored indictment of other tax advisors on similar grounds), numerous news stories suggested the KPMG accountants had somehow knowingly participated in tax fraud by creating fake losses for wealthy clients. Whether or not this proves true, the indictment makes no such allegation.

H'mm. Sound familiar?

In this era of misusing criminal laws to punish merely questionable business transactions, precisely the same situation is also playing out -- i.e., pre-emptive criminalization of business conduct being asserted before such conduct has even been determined to be illegal from a civil standpoint -- in the sad case of Jamie Olis and in the Enron-related Nigerian Barge case, Coyote Springs case, the Enron Broadband case, and the government's legacy Enron case against former Enron executives Ken Lay, Jeff Skilling and Richard Causey. The weakness of the government's charges in the Enron-related cases has prompted an increasingly desperate Enron Task Force to engage in a wide range of abuses -- such as intimidation of witnesses and proferring false testimony -- in an effort to obtain publicly-expected convictions of business executives while denying those executives exculpatory evidence that they could present in their defense at trial. The same syndrome is also playing out with regard to Eliot Spitzer's despicable public bludgeoning of former AIG CEO, Maurice "Hank" Greenberg.

Absent clear evidence of a crime -- which should be easily explainable in an indictment rather than the amorphous messes that masquerade as indictments in the cases described above -- all of these cases should be left to the civil justice system for remedying the actions that allegedly caused damages. That the government in many of these cases has resorted to serious abuses of power in an effort to obtain unfair convictions reflects that criminalization of business in the post-Enron era is much more about the political goal of placating public resentment toward wealthy business executives than upholding justice and the rule of law.

Are you listening, Tom DeLay?

Posted by Tom at 5:29 AM | Comments (0) |

Stros 2005 Review: 2005 NLCS Preview

So, after vanquishing the Braves for the second straight season in the National League Divisional Series, the Stros (89-73) face a 2005 rematch of the thrilling 2004 National League Championship Series against their arch-rival -- the St. Louis Cardinals (100-62).

As was the case before the 2004 series, the Cardinals have had the better season (combined RCAA/RSAA of 168 to the Stros' 75), but the two clubs are surprisingly evenly-matched coming into the NLCS. The Cardinals hit better than the Stros and actually have a slightly stronger pitching staff overall, but the Stros front three starting pitchers are the best in baseball and their key closers are pitching better than the Cards' main closers at this point. In fact, since bottoming out in late May, the Stros had precisely the same record as the Cards over the final 120 games of the seasons -- 74-46 for .617 winning percentage. Thus, the 2005 NLCS -- as with last season's seven game gut wrencher -- has all the makings of another close, hard-fought series.

The biggest discrepancy between the two clubs is in hitting, and there is really no way to get around that problem for the Stros. The following are the Stros hitters' final runs created against average ("RCAA," explained here) for the 2005 regular season, courtesy of Lee Sinins:

Morgan Ensberg 39
Lance Berkman 35
Craig Biggio 8
Jason Lane 6
Orlando Palmeiro 1
Jeff Bagwell 0
Charlton Jimerson 0
Charles Gipson -1
Todd Self -4
Eric Bruntlett -5
Luke Scott -6
Humberto Quintero -7
Jose Vizcaino -8
Chris Burke -12
Raul Chavez -12
Mike Lamb -12
Willy Taveras -13
Brad Ausmus -14
Adam Everett -21

The Stros ended up at a -26 team RCAA for the regular season (12th out of the 16 National League teams), which means that the Stros scored 26 fewer runs than an average National League team would have scored during the season.

The Stros lineup is not particularly balanced, but it's not without strengths, either. Lance Berkman (35 RCAA/.411 OBA/.524 SLG/.935 OPS) -- as with the Cards' Albert Pujols -- is one of the best hitters in the game, and Morgan Ensberg (39 RCAA/.388 OBA/.557 SLG/.945 OPS) has had a remarkable season. Moreover, although Jason Lane (6/.316/.499/.815) started slowly in his first season as a regular, he has produced at the same level as Ensberg (13 RCAA) since the All-Star break. Similarly, Mike Lamb has had generally horrible season (-12/.284/.419/.703), but he has picked it up recently, hitting 8/.319/.392/.609 over the final month of the season. Finally, 40 year old freak-of-nature Craig Biggio (8/.325/.468/.793) has had a wonderful season, but the remainder of the Stros' hitters are an amalgamation of young and old punch and judy hitters, Ausmus and Burke's latest historic yaks notwithstanding.

On the other hand, the Cardinals -- although not hitting as well as they did last season -- still hit considerably better than the Stros. Here are the Cardinals hitters' RCAA:

Albert Pujols 75
Jim Edmonds 30
Larry Walker 16
Reggie Sanders 12
John Rodriguez 6
John Gall 1
David Eckstein 0
Hector Luna 0
Chris Duncan -1
Skip Schumaker -1
Scott Rolen -6
So Taguchi -6
Scott Seabol -7
Mark Grudzielanek -8
Roger Cedeno -9
Mike Mahoney -9
Abraham Nunez -9
John Mabry -10
Einar Diaz -15
Yadier Molina -21

The Cardinals team RCAA of 38 was 5th among the 16 National League teams. Although not as strong as they would be with a healthy Scott Rolen at third base, the Cards' lineup is still reasonably bullish now that Walker and Sanders have come back from injuries to complement Pujols -- arguably the best hitter in the league -- and Edmonds, who is hitting at about half his RCAA from last season. The Cards' hitting approach is essentially to get men on base at the top of the order and then whack them in with their power in the middle of the lineup. Although this Cardinal team does not steal many bases, they really do not need to do so because they rely on big innings generated from the power-hitters in the middle of the lineup.

However, if this series is going to be won by the Stros, it will because of the Stros' pitching, particularly their starting pitching. Here are the Stros pitchers' most recent individual runs saved against average ("RSAA," explained here), although the number for each pitcher (except for Clemens and Pettitte) will change slightly based on the final week of the regular season:

Roger Clemens 53
Andy Pettitte 43
Roy Oswalt 32
Brad Lidge 14
Dan Wheeler 13
Chad Qualls 7
Mike Gallo 4
Travis Driskill 0
Scott Strickland 0
Chad Harville -1
Mike Burns -3
John Franco -5
Russ Springer -5
Brandon Backe -7
Brandon Duckworth -12
Ezequiel Astacio -14
Wandy Rodriguez -20

The Stros pitching staff's 97 team RSAA was second only to the Cardinals staff's 130 RSAA among the 16 National League teams. The Rocket and Andy Pettitte finished 1-2 in National League RSAA, and Roy Oswalt finished seventh. That performance by the three primary Stros starters is one of the finest seasons by three starting pitchers on one staff in modern baseball history. With Lidge, Wheeler and Qualls all pitching well out of the bullpen, the Stros have the most formidable pitching staff of any club in the 2005 playoffs.

However, the Cardinals' pitching staff is not chopped liver and, as noted above, has had an even better overall season than the Stros' staff. Here are the Cards pitchers' most recent RSAA numbers, which will change slightly when the final week of the regular season statistics are included later:

Chris Carpenter 40
Jason Isringhausen 13
Al Reyes 13
Mark Mulder 12
Jeff Suppan 11
Cal Eldred 9
Brad Thompson 8
Julian Tavarez 6
Jason Marquis 5
Matt Morris 5
Ray King 4
Randy Flores 3
Anthony Reyes 2
Gabe White 2
Tyler Johnson 1
Bill Pulsipher -1
Adam Wainwright -2
Kevin Jarvis -3
Jimmy Journell -3
Carmen Cali -4

Carpenter missed the tail end of last season and the postseason, so having him at the front of the rotation gives the Cardinals one of the only pitching staffs that matches up reasonably well with the Stros' staff. Carpenter has had the Stros' number so far this season -- going 4-0 in five starts against them -- but the Stros got to him in their final game against him and there are whispers that Carpenter is battling arm fatigue from the heavy load of innings that he has pitched this season. The remainder of the Cardinals' staff is essentially a group of above-average pitchers who will provide quality starts more often than not, which is about all the Cardinals need because of the high number of runs the club's lineup generates. One potential chink in the Cards' armor is their bullpen, which has not been as strong as last season and could be lit up in a game where the starter is blown out early or the team gets into a Stros-Braves Game Five-type extra-inning marathon.

So, there you have it. The clubs tangle in St. Louis tonight and tomorrow night, then come to Houston for three games over the weekend and on Monday, and then back to St. Louis for two games next week if the series goes that far. Although the Cardinals dominated the season series by winning 11 of the 16 games, that really doesn't mean much nwo. Berkman was not involved in a bunch of those early games, and the Cardinals' starting pitching depth is not as important in a short series as it is over the long haul. Busch Stadium is a bit more of a pitcher's park than Minute Maid Park, although Minute Maid is not as much of a hitter's park as many media and fans perceive. Both teams have sufficient power hitting to generate a slugfest or two even with the clubs' outstanding pitching. The Cardinals have been on cruise control for the past couple of months -- including in their easy divisional series against the Padres -- so the competitive edge definitely favors the Stros, who have had to fight and claw for both a playoff berth and then a divisional series victory in the longest playoff game ever played. If the Stros pitchers can keep the scores low and the Stros' hitters can continue their timely hitting from the Braves' series, this is definitely a series that the Stros can win.

But don't expect it in less than seven games. ;^)

Posted by Tom at 4:30 AM | Comments (0) |

October 11, 2005

Daniel Drezner is moving on

DanielDrezner.com -- maintained by University of Chicago assistant professor of political science, Daniel Drezner -- is one of the first weblogs that I regularly reviewed and it remains one of my favorites. Over its three year existence, it has become one of the most popular academic blogs in the blogosphere.

Professor Drezner disclosed this past weekend that his application for tenure at the University of Chicago had been denied and that, as a result, he will be moving on from his position there. This New York Sun article (hat tip to Howard Bashman) is already speculating that Professor Drezner's popular blog was one of the factors working against him in the notoriously stuffy academic world of considering tenure applications. Larry Ribstein -- who is at the forefront of addressing academic issues relating to blogging -- has more analysis here.

Regardless of whether Professor Drezner's blogging had any effect on the rejection of his tenure application, my sense is that this is a temporary setback for him. He is an insightful commentator on politics generally, and on foreign affairs and political economy issues in particular, so he will not be without gainful employment opportunities for long. UChicago's loss will be someone else's gain.

Posted by Tom at 10:33 AM | Comments (0) |

Nobel Laureate Thomas C. Schelling

Former University of Maryland economics professor Thomas C. Schelling was named the winner of the Nobel Memorial Prize in Economic Science yesterday along with Israeli economist Robert J. Aumann for their work in game theory, which essentially attempts to explain the choices that competitors make in situations that require strategic thinking. Mr. Schelling was the mentor of Marginal Revolution's Tyler Cowen, so don't miss Tyler's excellent overview of Professor Schelling's career and extraordinary contributions to economics, foreign policy and clear thinking. Tim Harford of the Financial Times also chimes in. Enjoy.

Posted by Tom at 9:43 AM | Comments (0) |

Does Time Inc.'s management read Clear Thinkers?

Last month, this post commented on the interesting story of former University of Alabama football coach and current University of Texas at El Paso football coach Mike Price's $20 million libel lawsuit against Time Inc. That post ended with the following comment:

"Does anyone else get the sense that Time needs to settle this case quietly?"

Well, Time Inc. has taken that advice and settled with Coach Price.

Time Inc. made a very good decision. Vanderbilt's football team would have a better chance of beating the University of Alabama at Tuscaloosa than Time Inc. would have had of prevailing against Coach Price in a Birmingham courtroom.

Posted by Tom at 7:35 AM | Comments (0) |

October 10, 2005

Addressing the real problem in New Orleans

Edmund Phelps is the McVickar Professor of Political Economy at Columbia University. In this Wall Street Journal ($) op-ed, Professor Phelps makes the remarkably simple but adroit insight that much of the political debate over the rebuilding of New Orleans from the damage of Hurricane Katrina is missing the true problem that bedeviled New Orleans:

The nation is still reflecting on the sight of New Orleans unprotected from Katrina and too feeble from poverty to run from it. Yet some basic issues have scarcely been debated.

So far, the focus has been on what to do about lost and damaged infrastructure. For our legislators and the public, that has raised fascinating questions of political philosophy. The federal government does not pay to defend New York state against Lyme disease or New York City against terrorist attack. So it is a question why it is a federal duty to pay for measures to protect or repair New Orleans from local storms.

The economist's answer is that a disrupted New Orleans has external costs on the farmers upriver and the producers everywhere who depend heavily on the city's great port to ship grain. At likely levels, New York's Lyme disease does not threaten the rest of the nation. Protecting Wall Street ranks high on that external cost test, but not high enough in the estimation of Congress. It is a matter of degree.

And then, Professor Phelps bores in on the real issue:

The talk about rebuilding, however, misses the meaning that most viewers found in the scenes from New Orleans. The impact lay in the helplessness of a large segment of the population -- helpless not because of infirmities for the most part, but because their earning power or their very employability was so meager that they lacked a car with which to get out of the city, or did not have the cash for weeks away from home. The scenes thus made vivid the failure of the American economy to offer work and pay to the less advantaged that would provide them with economic independence and with access to something like the sorts of lives and jobs found in the rest of society. Whatever scale and scope rebuilding takes, it will not raise pay rates of the working poor above pre-storm levels.

Professor Phelps goes on to explain how a regional approach to the problem of New Orleans' poverty is illusory and will not work, and that a well-designed national approach is necessary to address the underlying problem. Moreover, he explains that federal handouts are actually counterproductive to the true goal of eradicating poverty in New Orleans. He concludes with the following commen sense advice:

The events in New Orleans pointed to the tragic flaw of a great nation still in denial about impoverished workers among its own citizens and in a muddle about its causes and cures. There is emerging a sense that it would be good to solve this problem. What is needed now is an understanding of the policy innovations that would be constructive and those that would not.

Definite clear thinking. Check out the entire piece.

And while your thinking about New Orleans, take awhile to read this insightful and personal Micheal Lewis NY Times Sunday Magazine op-ed on his experience in New Orleans immediately after the hurricane, which includes gem-quality observations such as the following:

But my parents have lived their entire adult lives fighting an unwinnable war. In their lifetimes, New Orleans has gone from the leading city of the South to a theme park for low-rollers and sinners. All the unpleasant facts about a city that can be measured - crime, poverty and illiteracy rates, the strange forms of governmental malfunction - have remained high. The public schools are a hopeless problem, and the public housing is a source of endless misery. A disturbing number of my parents' white neighbors have fled to white towns on the far side of Lake Pontchartrain. My parents would never put it this way, but they are fatalists; they have come to view change as unfortunate and inevitable. That's one difference between stability and stagnation. A stable society has the ability to reject or adapt to change. A stagnant one has change imposed on it, unpleasantly. The only question is from what direction it will come.

Posted by Tom at 5:38 AM | Comments (2) |

2005 Weekly local football review

Despite this, football was still noticed in these parts over the weekend. First, the good.

Texas Longhorns 45 Oklahoma 12

Dr. Vince Young found a cure for the Stoops Curse -- it's called "Give me the ball and get out of the way."

Young threw for 241 yards and three TD's as the Horns (5-0) romped to their largest margin of victory in this hallowed series. Although Young is such an extraordinary player that he tends to attract most of the attention, the Horns' defense was really the difference in this game as it absolutely manhandled an overmatched OU offense that could muster only 171 yards of total offense.

Probably the best evidence that the Stoops Curse is officially a thing of the past is Coach Stoops' dubious decision to play injured stud running back Adrian Peterson, who "ran" ineffectively for 10 yards on three carries. That was a clear sign of desperation that reflects that things are getting a bit testy these days in Norman, Oklahoma.

By the way, the Horns will have their toughest game next Saturday since the Ohio State game when they host surprising Colorado (4-1).

Cowboys 33 Eagles 10

In their most impressive performance of the season, the Cowboys crushed the Eagles 33-10 as QB Drew Bledsoe directed the Pokes' to two early touchdowns and scores on six of their first seven drives and the defense shut down Philly QB Donovan McNabb and the NFL's top offense. The Pokes host the Giants next Sunday.

Houston Cougars 35 Tulane 14

After an unimpressive start to the season, the Coogs (3-2) had their second straight reasonably impressive performance in downing Tulane somewhere in Louisiana on Saturday afternoon. The Coogs -- who have genuinely talented skilled position players -- are developing a balanced offense that could be extremely difficult to defend as the season progresses. The Coogs host Memphis next weekend then go to SEC opponent Mississippi State the following weekend.

And now, the bad:

Titans 34 Texans 20

Can the Texans (0-4) really do this every week?

The answer is "you bet." The Texans continued their downward spiral, converting none of their 13 third downs and managing just one touchdown long after the game had been decided. They are the only winless team in the league and are 0-4 for the first time in their four year history. To make matters worse, the Texans' best player -- Pro Bowl receiver Andre Johnson -- left the game in the first quarter with a strained right calf and never returned.

Although 70,430 fans purchased tickets to the game, but only about two-thirds of those bothered to show up. Those that did endured Texans' QB David Carr go 18-of-27 for 131 yards with an interception that Tennessee converted into a field goal in the fourth quarter. Carr was also sacked seven times, which brings the Texans' sack total this season to 27. The Texans' fans roundly booed the team beginning in the second quarter and the stadium was mostly empty by the beginning of the fourth. The only time the crowd really cheered was in the second half when an update of the Stros' comeback against the Braves was announced and the remaining fans began to chant "Let's go Stros!"

I saw and spoke briefly with Texans' owner Bob McNair at the Stros-Braves game on this past Saturday night. I am glad that this good man is able to find some pleasant distractions from this mess. The Texans are on the nationally-televised game next Sunday night in Seattle, which could be very ugly.

Colorado 41 Texas Aggies 21

In game that was not as close as the final score indicates, the Aggies (3-2) did their best imitation of the Texans in rolling over and playing dead in Boulder, Colorado on Saturday night. As Ag QB Reggie McNeal does his best imitation of Texans QB David Carr, the Aggie defense does not appear to be able to stop a hard-charging marching band at this point.

Of the Aggies remaining six games, the Ags look to have a good chance of winning only two of those games, and neither of those (Oklahoma State at home next week and Iowa State at home on Oct. 29th) are locks. What once looked like a promising season now has a 5-6 finish looking like a distinct possibility.

As one crusty football coach once put it to me: "That will go over about as well as a turd in the punchbowl in Aggieland."

East Carolina 41 Rice 28

In one of the few games on their schedule that they could win, the Owls (0-4) defense rolled over and allowed a mediocre East Carolina team to do pretty much anything they wanted. The Owls get Tulsa at home next Saturday.

And don't forget to check out Kevin Whited's weekly Big 12 football review.

Posted by Tom at 4:17 AM | Comments (6) |

October 9, 2005

A baseball weekend in Houston for the ages

Until this weekend, I really never thought that anything would top this game. But I was wrong.

What can one say about a game in which the following occurred?:

The Stros came back from a 6-1 deficit with only four outs left in the game.

Superstar Lance Berkman lighting a fuse to the Minute Maid Park crowd that exploded when he hit a grand salami -- the second one in the game, following the Braves' Adam LaRoche's 3rd inning bomb -- to bring the Stros improbably within a run of the lead in the bottom of the 8th inning:

With the Stros within an out of returning to Atlanta for a Game 5 of the series, light-hitting Brad Ausmus -- probably the weakest hitting regular National League player over the past five years -- ripped a line drive yak to deep left-center (only his fourth home run of the season) that landed about an inch above the yellow home-run line and just a couple of inches beyond the Braves centerfielder Andruw Jones' outstretched glove;

Rookie Luke Scott -- who was the Stros' hottest hitter coming out of spring training but who eventually was farmed back to AAA Round Rock for another season of minor league training -- coaxing a key walk during the 8th inning rally and then coming within inches of winning the game in the 10th with his own walk-off yak;

The Stros using all of their position players so that burly backup catcher Raul Chavez ended up playing first base;

Every available pitcher in the Stros' bullpen pitching a total of 13 and 2rds innings and giving up just one run;

Dan Wheeler pitching three innings of masterful relief -- his longest stint of the season -- almost on fumes by the end the 15th inning;

As the last Stros pitcher available, 43 year-old Roger Clemens taking hold of his exhausted team and pulling them across the finish line with incredibly unyielding will and three innings of one hit relief pitching; and

25 year-old Chris Burke -- a potentially solid National League regular player who has accepted a part-time role on the club while a future Hall of Famer plays out his string at Burke's primary position -- pounding his first walk-off tater of his young career to end the longest Major League Baseball playoff game in history.

Remarkably, Sunday's already legendary game overshadowed an excellent Saturday night game before the biggest crowd in the history of Minute Maid Park in which Roy O held the Braves at bay until the Stros exploded for four runs against the Braves' bullpen in the bottom of the 7th to put the game away.

So, the Stros have now vanquished the Braves in the playoffs for the second straight season, at least partially removing some of the sting of losing Atlanta three straight times in the playoffs earlier during the Stros' Biggio-Bagwell era. This series was an odd one that turned out to be much higher scoring than anticipated, although the clubs ended up having a couple of close, low-scoring affairs in their final two games of the series -- they just decided to count those two games as one legendary, 18-inning game to close out the series.

Now, what does this club do for an encore? It's off to St. Louis again for a rematch of last season's gut-wrenching National League Championship Series with the Cardinals in which the Stros came within a game of their first World Series. The first game will likely be on Wednesday night with the Stros' Andy Pettitte facing Redbirds' ace, Chris Carpenter. I will post a more thorough analysis of the Stros-Cards series later in the week.

Like, after I catch my breath!

Posted by Tom at 7:38 PM | Comments (4) |

October 8, 2005

Delphi finally tanks

In perhaps the least surprising business move of the year, Delphi Corp. and 38 of its U.S. subsidiaries filed chapter 11 reorganization cases today in an attempt to restructure its money-losing auto supply business and resolve over-priced union contracts. Delphi advised the bankruptcy court in its initial filings that it has secured a $4.5 billion in debtor-in-possession financing and that it hopes to emerge from its reorganization in mid-2007.

By filing for bankruptcy, Delphi effectively ends bailout talks with its top customer and former parent -- General Motors Corp. -- and with the United Auto Workers Union. Without progress being made in those negotiations, Delphi elected to file its chapter 11 case before October 17, when new amendments to the Bankruptcy Code take effect that have a generally negative effect on corporate debtors. Delphi, which was spun off from GM in 1999, employs approximately 33,000 UAW workers in the U.S., pays benefits to 12,000 union retirees, and has annual revenues of about $28 billion.

Delphi has been in a world of hurt business-wise for some time. Faced with a daunting landscape of high labor costs, rising raw material costs and falling demand from its top U.S. customers, Delphi has struggled for the past several years to generate a profit -- last year, the company lost an astounding $4.9 billion and lost another $750 million in the first half of this year. The Pension Benefit Guaranty Corp., the quasi-governmental agency that administers failed public pension plans, will probably wind up administering Delphi's pension plan, which is underfunded by $4.3 billion.

Posted by Tom at 1:24 PM | Comments (0) |

Former General Re CEO receives a Wells notice

Following on earlier plea bargains, former General Reinsurance Corp. CEO Ronald Ferguson received a Wells notice from the Securities and Exchange Commission late last week in regard to the SEC's investigation into various "finite risk" structured finance transactions between General Re -- a subsidiary of Warren Buffett's Berkshire Hathaway -- with American Insurance General. A Wells notice advises the recipient that the SEC intends to pursue him for alleged violations of securities law and often precedes a criminal indictment on the same matters. Here are the previous posts on the investigation into General Re, AIG and Berkshire.

Mr. Ferguson, who was CEO of General Re from 1987 to 2001, declined to testify in May when he was first interviewed by regulators about his alleged role in the transactions with AIG. According to Justice Department allegations in the criminal cases against former General Re executives John Houldsworth and Rick Napier, Mr. Ferguson agreed in 2000 to structure a finite risk reinsurance deal for AIG that boosted AIG's loss reserves. After AIG's board blinked in the face of government threats of a criminal indictment over the transactions, AIG ran off Maurice "Hank" Greenberg -- the CEO who built AIG into one of largest insurers in the world -- and then admitted -- again under government pressure -- that it had accounted for the transactions improperly. Although Messrs. Houldsworth and Napier pled guilty in June to conspiracy to commit fraud in conneciton with the transactions and face up to five years in jail, there has been no court finding that the transactions were even improper from a civil standpoint, much less criminal in nature.

That last point apparently has been lost on the New York Times, which begins one of the paragraphs in its story with this statement: "Mr. Greenberg and Mr. Ferguson started the improper financial transactions on Oct. 31, 2000."

Posted by Tom at 12:34 PM | Comments (0) |

October 7, 2005

Interesting Stros' stat of the day

O.K., so things didn't go well last night, but the Stros can take some solace in that this interesting Allen St. John Wall Street Journal ($) article notes that the Stros are one of the top teams of the eight clubs in the playoffs in at least one important area -- that is, getting the most bang for their buck. Mr. St. John calculates the each playoff team's cost per win by simply taking a club's total payroll and dividing that number by the club's win total during the MLB season.

For example, compared to the Yankees, the Stros are remarkably efficient. The Yanks' $208 million payroll was by far the highest in baseball, comparable to the combined payrolls of the second-place Red Sox and the Dodgers. Accordingly, the Yankees' cost per win ($2.2 million) is almost 70% higher than that of the Red Sox ($1.3 million) and a whopping $1.437 million greater than the cost of each Stros' win.

The surprising Cleveland Indians (93-69) were the best penny-pinching team in MLB this past season as they achieved a frugal $446,263 per win. However, the Tribe faded in the final week of the season and failed to make the playoffs, and the other penny-pinching clubs really did not do particularly well this past season. For example, the Devil Rays were the most frugal club in MLB at $442,971 per win, but who cares when your overall record is 67-95?

Thus, a club needed to expect to spend about $900,000 per win to get into the playoffs. Apart from from the big-market Yankees and Red Sox, the other playoff teams fall within a reasonably narrow range between the White Sox's $759,373 per win to the $1.03 million per win for the Angels. As a result, Mr. St. John concludes as follows:

But as baseball's resources -- both money and information -- get spread out more evenly, it is beginning to appear that while adding a few tough-to-find bargains can make a team a contender, finding enough of them to carry you into the postseason may now be baseball's most difficult task. Just ask the Cleveland Indians.

Here is the cost per win chart for this season's playoff teams.

Posted by Tom at 11:13 AM | Comments (0) |

The Cost of Victory

Cost per Win
TEAM	PAYROLL	WINS	COST PER WIN
White Sox	$75.2 million	99	$759,373
Padres	$63.3 million	92	$771,839
Stros	$76.8 million	89	$862,685
Cardinals	$92.1 million	100	$921,068
Braves	$86.5 million	90	$960,636
Angels	$97.7 million	95	$1.029 million
Red Sox	$123.5 million	95	$1.30 million
Yankees	$208.3 million	95	$2.19 million

Posted by Tom at 10:04 AM | Comments (0) |

The latest suicide bomber?

Maybe it's due to the distraction of Texas-OU week or perhaps it's just a sign of the times, but the fact that a suicide bomber nearly entered the University of Oklahoma's football stadium last Saturday night while 84,000 people were watching OU thrash Kansas State sure seems to be flying a bit under the main radar screens, at least outside of Oklahoma. The bomber -- Joel Hinrichs III -- detonated an explosive device while sitting on a bench about 100 yards from the stadium after he apparently rushed off upon being required to have his backpack searched at the gate. This Counterterrorism blog post does a good job of summarizing the background and implications of the event, as does the TigerHawk in this post.

Posted by Tom at 9:10 AM | Comments (1) |

Louie Freeh goes J. Edgar on Bill Clinton

Does it ever seem as if, whenever 60 Minutes needs a rating boost, they do a Bill Clinton-scandal story?

At any rate, get ready for another such segment. Former Clinton Administration FBI Director Louis J. Freeh is promoting his new book My FBI: Bringing Down the Mafia, Investigating Bill Clinton, and Fighting the War on Terror (St. Martin's Press 2005), and this Washington Post article indicates that his 60 Minutes interview with Mike Wallace will be a general hammering session on former President Clinton:

Former FBI director Louis J. Freeh has denounced Bill Clinton over the scandals that marred his presidency and for his record on terrorism, saying the level of distrust was so great that he stayed in his post so Clinton could not appoint his successor.

In a forthcoming book and "60 Minutes" interview, Freeh, whose strained relations with Clinton were no secret, says he was so determined to distance himself from Clinton that he sent back a White House pass so that all his visits would be deemed official. This, he said, antagonized Clinton.

The WaPo report triggered the crack Clinton Scandal Response Team into action:

Clinton spokesman Jay Carson said last night: "This is clearly a total work of fiction by a man who's desperate to clear his name and sell books, and it's unfortunate he'd stoop to this level in his attempt to rewrite history." He noted Freeh contributed nearly $20,000 to Republicans, including President Bush, in the last campaign.

Gosh, seems like old times, eh? In fairness to the Clintonites, Mr. Freeh's tenure at the FBI is not without its bipartisan critics.

Posted by Tom at 5:48 AM | Comments (0) |

United Airlines finalizes chapter 11 exit financing

Following on this earlier post, UAL Corp., the parent of United Airlines, announced that it has finalized $3 billion in debt financing commitments from Citigroup Inc. and J.P. Morgan Chase & Co. that will allow the company to exit its long-pending chapter 11 case early next year. Here are the previous posts about the United Airlines bankruptcy saga and related airline industry financial issues.

The airline industry is in a world of hurt right now, suffering under the toxic combination of record jet-fuel prices, stiff competition from lower-cost discount airlines, and dubious management decisions of legacy airline companies. UAL filed for Chapter 11 in December 2002, so even if it stays on course with its reorganization plan, it will emerge from chapter 11 after operating for over three years under bankruptcy court protection. US Airways Group Inc. has gone through a chapter 22 case (two Chapter 11 filings) over the past three years, and just recently emerged from bankruptcy under a plan based on a merger with America West Holdings Corp. Delta Air Lines and Northwest Airlines both filed chapter 11 cases on Sept. 14.

UAL had been shopping its exit financing package over the past several months to a number of institutions, including Deutsche Bank AG and General Electric Co. During that time, UAL considered an exit financing approach that would include equity funds from a rights offering or private-equity investment, but opted for the highly-leveraged debt package when the prospective equity investors demanded too big a piece of the reorganized airline's equity pie. Under the deal that UAL selected, Citigroup and J.P. Morgan Chase will syndicate the secured loan to a consortium of financial institutions.

United will submit the exit-financing agreement to the bankruptcy court today, and a hearing on UAL's pending disclosure statement is scheduled for Oct. 20. Once the disclosure statement is approved by the bankruptcy court, then the process of creditor voting on the plan will take place over the next couple of months. United's proposed plan proposes to pay secured claims, priority tax claims and administrative claims in full, and to pay a dividend of 4% to 7% on unsecured claims in the form of common stock in the reorganized UAL.As in typical in such debt for equity plans, existing common and preferred equity in UAL is washed out and holders of such equity receive nothing under the plan.

Posted by Tom at 4:35 AM | Comments (0) |

October 6, 2005

Interesting Stros' stat of the day

As Stros fans bask in the warm glow of the Stros' decisive victory over the Braves yesterday in the first game of their National League Divisional Series, ponder this -- in games in which the Stros score at least six runs, their record is an astounding 48-4, which computes to a .923 winning percentage.

Stated simply, the Stros are nearly unbeatable if they score at least six runs in a game.

Two of the premier pitchers of this era -- the Stros' Roger Clemens and the Braves' John Smoltz -- hookup in tonight's second game (tropical storm weather permitting) in Atlanta.

Posted by Tom at 10:21 AM | Comments (1) |

The Stoops Curse

On the surface, all things look rosy in Texas Longhorn football land these days.

The Horns are the second-ranked team in the U.S., dramatically defeated Michigan in the Rose Bowl after last season, have already beaten mighty Ohio State on the road this season, and have a bonafide Heisman Trophy candidate in QB Vince Young. So, coming into the annual Texas-OU game this weekend in Dallas against an Oklahoma team that has been relatively unimpressive this season, the Horns and their faithful should be calm and supremely confident, right?

Not a chance.

As this Ted Lewis piece notes, you can almost feel Coach Brown and his team gripping the golf club too tightly as they prepare to confront their nemesis, OU head football coach Bob Stoops, whose teams have beaten the Horns for the past five straight years. There is a palpable sense that the mere thought of Coach Stoops throws Coach Brown into a panic, and that Texas' dull offense (at least pre-Vince Young) does not even challenge the defensive-minded Stoops:

Chicago Bears rookie running back Cedric Benson, who just finished playing four years for Brown, sees it much the same way, saying during an ESPN radio interview that "without a doubt" the Texas coaches approached the Oklahoma game trying not to lose more than planning to win.

Certainly the Longhorns, dominant against just about everybody else during Brown's tenure (their 73 victories in his seven-plus seasons at Texas are more than anyone else in the same span), have not been at their best against the Sooners of late.

"We know there are questions about Oklahoma, and that's fair," Brown said. "We haven't played very well or coached very well on that day."

Indeed.

Two of the last five games wound up in humiliating blowouts – 63-14 in 2000 and 65-13 in 2003.

Last year, Oklahoma won 12-0, handing Texas its first shutout in 24 years.

Small wonder frustrated Texas fans have taken to wearing "Reverse the Curse" ornaments.

Still, the Horns are a 14-point favorite, the biggest spread in the game since 1970. OU lost two of its first three games this season, including a shocking home defeat to TCU. Given the Horns' strong play so far this season, Coach Brown should be brimming with confidence, right? Well, not exactly. Commenting on OU's victory this past weekend over Big 12 rival Kansas State, Coach Brown said the following:

"Bob has done an amazing job getting his kids back together. They used that week off to get themselves back to being the Oklahoma teams we're used to -- quick, tough and aggressive."

Yeah, and there is that little problem about the five straight losses to OU, which Coach Stoops uses with the mastery of an experienced gridiron psychologist:

"It gives us the confidence that we match up well against them and we understand what they like to do," Stoops said. "Our players have a sense of that."

Even Barry Switzer, the hated former OU coach whose teams dominated UT for over a decade, chimed in:

"The problem for Mac is getting it done," Switzer said. "He's supposed to win, and by more than he was before the season began. If he can't get it done this time, it's really going to eat away at him. . . "

This is clearly a huge game for Texas and Coach Brown, another put-up-or-shut-up game for a program that has been notorious for underachieving during most of Coach Brown's tenure. Last season's Rose Bowl game was the Horns' highest-profile bowl appearance since they lost the 1978 Cotton Bowl game to Notre Dame while ranked no. 1 in the country. Despite Texas' dramatic win, Michigan was not really a top-tier team last season -- it lost to mediocre Notre Dame and Ohio State (7-4) teams, and San Diego State came within three points of beating the Wolverines at Ann Arbor. As a result, Michigan was ranked only 13th in the BCS standings going into the game and only Pitt, the Big East co-champion, had a worse BCS standing (21st) among the eight schools that played in the last season's BCS bowl games.

In 17 seasons at North Carolina and Texas, a Coach Brown team has never won a conference title. Now, that is understandable at North Carolina, which is a basketball school and had to deal with conference-rival Florida State during Coach Brown's tenure. But no conference championships at Texas -- where the resources and talent pool is virtually unlimited -- is almost unfathomable.

In fact, the quality of play of Coach Brown's Texas teams has often had an inverse relationship with the relative importance of the game, as the following reflects:

Those five consecutive losses to Oklahoma.

An 0-2 record in Big 12 championship games, where the Horns lost to Nebraska in 1999 and, with a BCS bowl berth seemingly in the bag, were upset by Colorado in 2001.

A 4-3 bowl game record, including that horrifying 28-20 loss to Washington State in the 2003 Pacific Life Holiday Bowl in which Texas' offense acted as if it had never seen a zone blitz before.

Accordingly, despite the apparent mismatch, this particular OU game may be the most important game of Mack Brown's coaching career. The Horns' win over a strong Ohio State team on the road was arguably the most impressive win by a Brown-coached team. But if the Horns blow this one to OU and its uber-coach Stoops, then the Ohio State win will quickly fade from memory as Longhorn fans contemplate whether the Texas program will ever gain true top-tier status under the very well-paid Coach Brown.

Posted by Tom at 7:04 AM | Comments (0) |

And you thought the recent hurricanes were bad?

As the U.S. goes about recovering from the double whammy punch of the two hurricanes that hit the Gulf Coast region over the past month or so, this NY Times article reminds us that a potentially much more serious threat to our well-being is looming on the horizon:

"Two teams of federal and university scientists announced today that they had resurrected the 1918 influenza virus, the cause of one of history's most deadly epidemics, and had found that unlike the viruses that caused more recent flu pandemics of 1957 and 1968, the 1918 virus was actually a bird flu that jumped directly to humans.

The work, being published in the journals Nature and Science, involved getting the complete genetic sequence of the 1918 virus, using techniques of molecular biology to synthesize it, and then using it to infect mice and human lung cells in a specially equipped, secure lab at the Centers for Disease Control and Prevention in Atlanta.

The findings, the scientists say, reveal a small number of genetic changes that may explain why the virus was so lethal. The work also confirms the legitimacy of worries about the bird flu viruses that are now emerging in Asia.

The new studies find that today's bird flu viruses share some of the crucial genetic changes that occurred in the 1918 flu. The scientists suspect that with the 1918 flu, changes in just 25 to 30 out of about 4,400 amino acids in the viral proteins turned the virus into a killer. The bird flus, known as H5N1 viruses, have a few, but not all of those changes."

Here is a companion NY Times article on the growing political concern in Washington over the prospects of an epidemic. The 1918 flu pandemic killed an estimated 25 to 50 million people and, as the articles report, we are not much better protected from the virus now as the world was then. Even the mere reconstruction of the virus for research purposes has raised concerns:

Richard H. Ebright, a molecular biologist at Rutgers University, said he had concerns about the reconstruction of the virus and about publication of procedures to reconstruct the virus. "There is a risk verging on inevitability, of accidental release of the virus; there is also a risk of deliberate release of the virus," he said, adding that the 1918 flu virus "is perhaps the most effective bioweapons agent ever known."

During a closed door Senate briefing last week, Secretary of Health and Human Services Michael O. Leavitt and other senior government health officials warned of the implications of such a flu pandemic in the U.S.:

Mr. Leavitt warned in the briefing last week that an outbreak could cause 100,000 to 2 million deaths and as many as 10 million hospitalizations in the United States, one person who was present said. Those numbers have been presented publicly many times before. But hearing them in closed session gave them urgency, some who were at the meeting said.

Since 1997, avian flu strains have infected thousands of birds in 11 countries, primarily in Southeast Asia. So far, it is probable that virtually all of the 100+ people who have been infected with the disease (about 60 of whom have died) received the virus directly from infected birds. Thus, at least to date, there has been no or very little transmission between people, which is a requirement for an epidemic. Moreover, if the virus does begin being transmitted between humans, then there is a possibility that the mutated virus may be weaker and less lethal than the viral strain contracted directly from birds.

However, this remains a huge potential public health problem and not one that should be ignored merely because the pandemic may not occur or may be years away. Here's hoping that the federal government does a better job planning for this potential problem than it did for a direct hit by a category 4 hurricane on New Orleans.

Update: Eric Berger chimes in with this informative post over at his very smart SciGuy blog.

Posted by Tom at 6:24 AM | Comments (1) |

WSJ editors do better, but where have they been?

After criticizing the Wall Street Journal yesterday for running a listless article about prosecutorial misconduct in the Enron-related criminal cases, it's only fair to note that the WSJ editors do much better today in this editorial ($) (see this related NY Times article) decrying the fact that nine defendants -- including eight former KPMG partners -- have been sold out to the government by the firm (see also this post) and face criminal prosecution for tax shelters that have never even been determined to be illegal from a civil standpoint (here are the previous posts on the KPMG tax shelter saga). The WSJ notes as follows:

The KPMG case attempts to short-circuit the messy business of proving that a tax shelter is illegal by using the power of prosecution to target the tax advisers directly. And by cutting them off from the support of their firm through the threat of a death-sentence indictment of KPMG itself, the government seems intent on compelling the accused to cop a plea or settle the case, and so deny them their day in court.

Tax evasion is a serious matter, but so is a criminal indictment for conspiracy. KPMG's partners in this case believed they were selling shelters that were entirely legal, and the underlying legality of those shelters has never been formally challenged. Yet the government has come down on those accountants and tax lawyers as if they belonged to the mob. A case of curiouser and curiouser, said Alice.

The Journal should be complimented for addressing the misuse of criminal law in the KPMG case, which is another example of the criminalization of business generally that has taken place in the U.S. since the hyper-publicized demise of Enron. However, precisely the same situation that is taking place with regard to the KPMG defendants -- i.e., defendants sold out by their employer and pre-emptive criminalization of business conduct before it has even been determined to be illegal from a civil standpoint -- has already resulted in egregious miscarriages of justice in the sad case of Jamie Olis and in the Enron-related Nigerian Barge case and Coyote Springs case. It's convenient to criticize such conduct when the target is a high-profile executive or former partners in a highly-publicized accounting firm. But where has the WSJ been with regard to those lesser-known but equally misguided prosecutions, which have already resulted in untold misery to the imprisoned executives and their families?

Oh well, better late than never, I guess.

Posted by Tom at 4:26 AM | Comments (1) |

October 5, 2005

The Katrina and Rita ripples on the natural gas market

Following on this thread of posts over the past month, natural gas for November delivery rose 20.7 cents to a record $14.224 per million British thermal units on the New York Mercantile Exchange Tuesday afternoon after Interior Secretary Gale Norton warned it would probably take months before repairs to oil and gas production facilities in the Gulf of Mexico region would return production from that key region to normal. The Minerals Management Service reported that Gulf oil and gas production remains severely restricted, with 90% of the oil and over 70% of natural gas still off-line now a week and a half after Hurricane Rita came ashore.

The gas market was already stretched thin by heavy demand from power generators over the summer, but the double whammy of damage to production facilities from Hurricanes Katrina and Rita over the past month have jolted the natural gas market. As a result, futures contracts on the Nymex have nearly doubled since late July. The one good piece of news from the oil and gas markets was that crude oil, gasoline and heating-oil futures continue to weaken in the face of high pump prices and resultant diminished U.S. gasoline consumption in recent weeks. Oil futures fell for the third straight session on the Nymex as November light, sweet crude-oil futures slid $1.57 to $63.90 a barrel, the lowest price since mid-September.

Posted by Tom at 6:00 AM | Comments (0) |

Is this all the better that the WSJ can do?

I recognize the Wall Street Journal's John R. Emshwiller has already cashed in on the Enron saga. But even that reason for wanting to move on to something else cannot explain this tepid ($) article on the prosecutorial misconduct that has tarred the Enron case and is now the subject of a pending motion to dismiss the criminal charges against former Enron key executives Ken Lay, Jeff Skilling and Richard Causey.

Although Mr. Emshwiller notes some of the allegations regarding prosecutorial misconduct in the pending Lay-Skilling-Causey motion, he inexplicably ignores compelling evidence of misconduct that has already occurred in other Enron-related cases, including the fact that such misconduct has already contributed greatly to the unjust conviction of at least four men. Meanwhile, Mr. Emshwiller's article even suggests that the Enron Task Force is on the side of the greater public interest in requesting public disclosure of the confidential sources of information relating to prosecutorial misconduct that has provided under seal to the judge in the case, but then fails to explain how such confidential sources could be protected from Task Force retribution if they were publicly revealed and fails to report that it's been the Task Force that has continually attempted to suppress evidence that would be helpful to the defendants in the only Enron-related criminal cases that have actually gone to trial.

My goodness, has the presumption of guilt toward any Enron-related defendant reached the point where even the nation's leading business newspaper has simply dispensed with even reasonably detailed or at least balanced reporting on the case?

Posted by Tom at 4:57 AM | Comments (0) |

Stros 2005 Review: National League Division Series Preview

Didn't we just preview a series between these two teams?

For the fifth time in less than a decade, the Stros and the Braves -- two of the most successful National League clubs during that era (see this timely Wall Street Journal ($) interview with Atlanta GM John Schuerholz) -- meet in a post-season playoff series. The Braves have won three of the previous series, but the Stros won the one that means the most to this series -- i.e., the most recent one last season.

Interestingly, both the Stros and the Braves are a different type of club than they were last season, and they are quite similar teams. Each team has several strong hitters, but both clubs are below average hitting-wise overall with the Braves being slightly stronger in that department. Similarly, both teams have strong pitching staffs, although the Stros are stronger than the Braves in that department. Overall, both clubs have a combined RCAA/RSAA score of around 70, so these are evenly-matched clubs. Indeed, the Braves won just one more game than the Stros during the regular season.

The following are the Stros hitters' final runs created against average ("RCAA," explained here) for the 2005 regular season, courtesy of Lee Sinins:

Morgan Ensberg 39
Lance Berkman 35
Craig Biggio 8
Jason Lane 6
Orlando Palmeiro 1
Jeff Bagwell 0
Charlton Jimerson 0
Charles Gipson -1
Todd Self -4
Eric Bruntlett -5
Luke Scott -6
Humberto Quintero -7
Jose Vizcaino -8
Chris Burke -12
Raul Chavez -12
Mike Lamb -12
Willy Taveras -13
Brad Ausmus -14
Adam Everett -21

The Stros ended up at a -26 team RCAA for the regular season (12th out of the 16 National League teams), which means that the Stros scored 26 fewer runs than an average National League team would have scored during the season. However, the hitting has stabilized over the second half of the season as the club has a 2 team RCAA since the All-Star Game. Had the club been able to maintain just that barely above average level of hitting throughout the season, the Stros pitching has been so strong that the club would have challenged the Cardinals for the NL Central Division title.

The Stros have four reasonably strong hitters -- Morgan Ensberg (39 RCAA/.388 OBA/.557 SLG/.945 OPS), Lance Berkman (35/.411/.524/.935), Craig Biggio (8/.325/.468/.793) and Jason Lane (6/.316/.499/.815). Since the All-Star break, Berkman has been the club's best hitter with a 24 RCAA, and actually Lane and Ensberg have produced at the same level (13 RCAA) during that period, although Ensberg had a much stronger first half of the season.

Beyond those four hitters, the Stros are pretty much a hit and miss (mostly miss) group. The only other Stro regular with much hitting potential is Mike Lamb, who has had a generally horrible season (-12/.284/.419/.703) but has had a strong 8 RCAA since September 5th. With the exception Jeff Bagwell -- who has been relegated to pinch-hitting duties since returning from shoulder surgery to contribute to the playoff drive down the stretch of the regular season -- the rest of the Stros are a mish-mash of singles hitters with below-average on-base averages. That's the primary reason why the Stros are a below-average hitting club.

On the other hand, the Braves' hitters are a bit better, but they aren't reminding anyone of the 1927 Yankees, either:

Chipper Jones 33
Andruw Jones 22
Marcus Giles 14
Jeff Francoeur 9
Rafael Furcal 5
Wilson Betemit 1
Ryan Langerhans 1
Julio Franco -1
Pete Orr -2
Eddie Perez -3
Todd Hollandsworth -4
Brian McCann -4
Brayan Pena -4
Andy Marte -8
Kelly Johnson -9
Adam LaRoche -9
Raul Mondesi -11
Brian Jordan -13
Johnny Estrada -19

The Braves have a 2 team RCAA, which places them 9th among the 16 National League teams. Andruw Jones (22/.347/.575/.922) has gotten the most publicity of all the Braves hitters this season because of his 51 yaks, but the other Jones -- Chipper (33/.412/.556/.968) -- is actually the more productive hitter. Marcus Giles (14/.365/.461/.826) and Rafael Furcal (5/.348/.429/.777) are reasonably steady hitters with good speed, and Jeff Francoeur (9/.336/.549/.885) has had a better rookie season than the Stros' rookie Wily Taveras, but he slumped badly at the end of the regular season and shares Taveras' dubious aversion to accepting walks that would make his on base average better than an average National League hitter. The remainder of the Braves' hitters are similar to the lousy Stros hitters, although the Braves bad hitters do have a bit more power than the Stros bad hitters.

In the pitching department, the Stros have a clear edge, but the Braves pitchers are not chopped liver by any means. Here are the Stros pitchers' most recent individual runs saved against average ("RSAA," explained here), although the number for each pitcher (except for Clemens and Pettitte) will change slightly based on the final week of the season:

Roger Clemens 53
Andy Pettitte 43
Roy Oswalt 33
Brad Lidge 14
Dan Wheeler 13
Chad Qualls 7
Mike Gallo 4
Travis Driskill 0
Scott Strickland 0
Chad Harville -1
Mike Burns -3
John Franco -5
Russ Springer -5
Brandon Backe -7
Brandon Duckworth -12
Ezequiel Astacio -14
Wandy Rodriguez -20

The Stros pitching staff's 100 team RSAA is second only to the Cardinals staff's 130 among the 16 National League teams. The Rocket and Andy Pettitte finished 1-2 in National League RSAA, and Roy Oswalt finished seventh. That performance by the three primary Stros starters is one of the finest seasons by three starting pitchers on one staff in modern baseball history. With Lidge, Wheeler and Qualls all pitching well out of the bullpen -- and with Backe already a proven commodity in post-season play -- the Stros have the most formidable pitching staff of any club in the 2005 playoffs.

As noted above, the Braves pitchers also are a solid group. Here are their most recent RSAA numbers, which will change slightly based upon the final week of play:

John Smoltz 34
Jorge Sosa 28
Tim Hudson 19
Blaine Boyer 8
Kyle Farnsworth 8
Mike Hampton 7
Chris Reitsma 6
Kevin Gryboski 3
Jay Powell 2
Jorge Vasquez 1
Frank Brooks 0
Matt Childers 0
John Foster 0
Seth Greisinger 0
Jim Brower -1
Anthony Lerew -1
Macay McBride -1
John Thomson -1
Roman Colon -4
Kyle Davies -4
Tom Martin -4
Joey Devine -6
Dan Kolb -6
Horacio Ramirez -6
Adam Bernero -11

The Braves 71 team RSAA is fourth in the National League. Smoltz is the best post-season pitcher of this era, and Sosa has developed into a legitimate stud. Tim Hudson has already shutout the Stros earlier this season, although that's probably not that big a deal given how often the Stros have been shutout this season. The Braves pitching problem this season has been an inconsistent bullpen, although former Cub Kyle Farnsworth has provided an unexpected boost in that area during the second half of the season. Here's hoping that he reverts to his Cubs form during the playoffs.

So, there you have it. Two closely matched teams playing for the probable opportunity to take on a somewhat diminished Cardinals team for the National League Championship. Although it seems simplistic to say that the team that scores the most runs will probably win the series, each run scored will be a precious achievement during this series given the strength of the pitching on both clubs. I expect a tense, close, low-scoring series that will go the entire five games and produce a winner that will beat the Cardinals in the NLCS. Now let's sit back and enjoy the ride. Game one of the series begins today at 3 p.m. with Pettitte going for the Stros against the Braves' Hudson, and then tomorrow's second game of the series gets prime-time coverage at 7 p.m. as Clemens and Smoltz tangle.

Posted by Tom at 4:00 AM | Comments (3) |

October 4, 2005

A popular Stros fan in Boston

According to the Boston Herald, Red Sox center fielder Johnny Damon did not realize that he had accidentally received a Houston Astros Division Series cap Sunday afternoon until someone pointed it out to him during a live television interview:

"I saw the star, and I just thought it was a different (cap) design," said Damon about the Astros insignia. "I'm sure people thought I was rooting for the Astros."

Red Sox equipment manager Joe Cochran said "slip-ups like that occasionally happen."

Posted by Tom at 10:01 AM | Comments (3) |

The "Energy Hog?" -- Let's hope for a mild winter instead

On the heels of announcing the sale of almost a billion dollars worth of power plants in New York City and the Bush Administration announcing an energy conservation campaign centered around a mascot called the "Energy Hog," Houston-based Reliant Energy Inc. announced Monday that it would be raising its electricity prices for Houston-area customers by almost 15% as soon as possible and could implement an additional increase of about 10% in January. Those price increases will make Reliant's price for electricity among the highest in the nation.

Under Texas' deregulation law, Reliant is required to offer a semiregulated price through 2006 that is tied to natural-gas prices. Reliant's current electricity rate is based on a price of $7.50 per million BTUs for natural gas, so it is increasing its electricity rates based on a benchmark price of $11.38 per unit for natural gas. Reliant's two-step increase will result in a price of more than 16 cents a kilowatt-hour from the current 12.88 cents.

Reliant's move comes as markets continue to adjust to the soaring price of natural gas. Supplies of natural gas have been severely constricted as a result of the two Gulf Coast hurricanes over the past month, and federal officials and industry analysts are becoming increasingly concerned about rising energy costs over the winter months. Natural gas heats and cools about 52% of the nation's homes and, over the past year, natural gas prices have risen to $14.02 per million British thermal units from $6.73 per mBtu, a 108% gain. Similarly, heating oil has risen 50%, to $2.08 a gallon from $1.39 a gallon. Those increases make crude oil's 31% increase from $49 a barrel to $65.47 seem tame in comparison.

In deregulated markets such as Texas, gas-burning plants generally set the market price. Thus, power companies such as TXU Corp. that have large portfolios of low-cost nuclear and coal-fired plants are allowed to sell electricity at retail prices that far exceed their actual wholesale generating costs because the price is established based on the higher cost natural gas-fired plants. Reliant owns only one big power plant in Texas, so it has to contract to buy electricity from other suppliers such as Texas Genco LLC, which is being purchased by NRG Energy Inc. Those Texas Genco plants once belonged to Reliant, but they were sold as a part of the move toward deregulated market in Texas.

Meanwhile, the seriousness of the problem relating to reduced natural gas supplies was underscored yesterday as the Bush Administration resembled the Carter Administration in calling for energy conservation throughout the nation. The Department of Energy announced a new campaign to educate the public on ways to cut energy use, particularly with regard to home heating. The effort will include radio and television spots, newspaper advertisements and a consumer's guide with energy-saving tips focusing on tips on improving home insulation, monitoring thermostats and using products to curb energy consumption. The campaign's mascot is the Energy Hog, which is unlikely to be remembered in the same vein as Ronald McDonald after this current situation passes.

Posted by Tom at 7:32 AM | Comments (0) |

The remarkable Mr. Biggio

On the heels of their dramatic win in the last game of the regular season to seal the National League Wild Card Playoff berth, the Stros announced today that the club had signed future Hall of Famer and lifelong Stro Craig Biggio to a one year, $4 million contract covering the 2006 season. Bidg will play that season as a spry 40 year old.

Although the purely baseball-related analysis of whether to bring Bidg back is a closer question than the casual fan might think, it's hard to look at what the Stros accomplished this season and not think back to the one game that was truly the turning point -- that September 7 game in Philly when a ninth-inning, two-out, three-run home run by Bidg completed an Astros sweep of the Phillies. That Billy Wagner fastball that Bidg parked in the leftfield seats turned out to be the difference between the Stros going to the playoffs and the Phils going home.

But as good a baseball player as Bidg has been to the Stros, he has turned out to be something more for the club and the city. Bidg is a genuinely nice man who has embraced Houston as his family's home as much as Houston has embraced him as the face of its baseball team. Craig Biggio is a dying breed, the professional athlete who plays his entire Hall of Fame career in the city that he adopts as his home. As a result, Stros owner Drayton McLane is clearly making the right decision in accomodating this aging star in playing out his string in Houston. As with Roger Clemens, it is highly unlikely that any of us will ever see the likes of Craig Biggio on a baseball field again in our lives.

Bidg's recent seasons and career statistics are here.

Posted by Tom at 3:17 AM | Comments (0) |

Craig Biggio statistics

Craig Biggio
YEAR	AGE	RCAA	OBA	SLG	OPS	AVG	HR	RBI	SB	G
2003	37	1	.350	.412	.763	.264	15	62	8	153
2004	38	8	.337	.469	.806	.281	24	63	7	156
2005	39	8	.325	.468	.792	.264	26	69	11	155
CAR		354	.370	.437	.807	.285	260	1063	407	2564
LG AVG		0	.338	.419	.757	.268	279	1229	207
POS AVG		-104	.333	.392	.726	.265	202	1037	232

Posted by Tom at 3:15 AM | Comments (0) |

October 3, 2005

Guardian profiles Jon Stewart

This Guardian article profiles Comedy Central's Jon Stewart, who reveals that his real name is Jonathan Stewart Leibowitz and why he dropped his last name for show business purposes:

"I'm not a self-hating Jew. Actually, to borrow a line from Lenny Bruce, I just thought Leibowitz was too Hollywood."

In the meantime, while discussing celebrities, the Onion reports that Lance Armstrong recently confronted an endurance test that almost overwhelmed him.

Posted by Tom at 8:01 AM | Comments (0) |

Can't say I expected this

President Bush has nominated White House counsel and Dallas-based attorney Harriet Miers to replace Sandra Day O'Connor on the Supreme Court of the United States. Ms. Miers has never been a judge before, the first such non-judge nomination since that of the late Chief Justice William Rehnquist.

Ms. Miers was the first woman to be president of the State Bar of Texas and, for a time during the President's stint as a businessman, she was his personal lawyer.

Howard Bashman has an extensive list of developing links on Ms. Miers. And Professor Bainbridge asks very reasonable questions and makes challeging observations regarding the nomination here. And Tom Goldstein and Lyle Denniston over at SCOTUSBlog are already expressing skepticism that the Senate will approve the nomination. On the other hand, William Dyer provides an impassioned defense of a nomination of a non-jurist to the Supreme Court.

Posted by Tom at 7:34 AM | Comments (0) |

Defending the most important executive perk

A fair bit of chatter was generated in the locker rooms of many golf clubs over the past weekend by this Wall Street Journal ($) article on Friday that detailed the rather embarrassing use of corporate aircraft as airborne limousines to fly CEOs and other executives to golf dates or to vacation homes where they have golf-club memberships. In the article, Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, calls it "disgusting" for a company to guarantee its CEO numerous hours of free personal flight time in order for the exec to make his tee times:

"A corporate aircraft isn't supposed to be a shuttle to a vacation home. We pay CEOs enough. They can afford to pay to fly to their vacation homes."

Is nothing sacred anymore? The hard-earned right to jet off to a golf game has been a savored executive perk for years. In this post-Enron era of demonizing business executives, is not there anyone who will stand up and defend the beleaguered executives in retaining this hallowed perk?

You bet there is. Just call Professor Bainbridge.

I'm betting that the Professor gets some major consulting work out of his work in this area. ;^)

Posted by Tom at 7:12 AM | Comments (0) |

The latest urban boondoggle

Houston's light rail system is a depressing black hole that gobbles huge amounts of money, so we are reduced to feeling somewhat better about that waste by stories such as this one that portend an even bigger urban boondoggle:

A decade ago, local leaders [in the Raleigh-Durham Research Triangle area of North Carolina] started planning a regional rail system, hoping to avoid a future of clogged highways and frustrated commuters. . .

The Triangle Transit Authority wants to build the $759 million system. But TTA is struggling to answer rigorous questions from federal officials about predictions of how many people will ride.

No dirt has yet been turned, although TTA has spent nearly $43 million acquiring land and access to an existing railroad corridor.

The project's cost has ballooned from a 1994 estimate of about $100 million to a new estimate of $759 million.

Even at that price, the 28-mile route would be seven miles shorter than its backers have long wanted, a reduction that saves money. Four stations were cut, three in North Raleigh and one at Duke University Medical Center.

For now, federal authorities have held up approval of most of the money needed for the project, more than $400 million. . . TTA's ridership forecasts were "unexpected and unexplainable," according to a memo written Aug. 1 by Jennifer L. Dorn, administrator of the Federal Transit Administration.

For the first time, [area leaders are] talking about possibly needing more money from Triangle taxpayers to keep the project on track. Previously, he and other TTA leaders have said that new local taxes would only be needed later to expand to North Raleigh and Chapel Hill. . .

TTA's predictions for riders make clear that taxpayers should not expect the rail to make a huge dent in traffic. The system was last forecast to carry about 14,000 riders a day when trains start.

That number amounts to removing less than a lane of traffic on the busiest part of today's Interstate 40.

Read the entire piece. Is there simply no end to this type of pork barrel spending run amok? Hat tip to Craig Newmark for the link to the Triangle area story.

Posted by Tom at 6:33 AM | Comments (0) |

Choi wins at Greensboro

K.J. Choi of The Woodlands cruised to a two-shot victory on Sunday in the Chrysler Classic of Greensboro to win his first PGA Tour golf tournament in almost three years. The sweet-swinging South Korean native led the field during the tournament in both driving accuracy (83.9%) and putts per green in regulation (1.618), and shot 22 under par for the tournament. That's a good prescription for winning golf tournaments.

Choi is an interesting fellow. His life story -- which he recounted in this speech several years ago -- is quite inspiring. Check it out.

Posted by Tom at 5:40 AM | Comments (0) |

Texas Genco turns power generating assets for huge profit

Less than a year after a group of four private equity funds banded together to acquire Texas Genco Holdings, Inc. from CenterPoint Energy for $3.7 billion, the buyers are proposing to sell Texas Genco to NRG Energy Inc. for $5.8 billion in cash and stock in a deal that confirms the red-hot nature of the market for power generation assets.

Under the deal, NRG -- which emerged from chapter 11 just two years ago -- will pay $4 billion in cash and will give the sellers $1.8 billion in stock in NRG, which amounts to about a 25% stake in NRG. NRG also will assume an additional $2.5 billion in debt. As a result of the acquisition, NRG will become one of the country's largest independent generators with more than 24,000 megawatts of capacity from plants in California, the Northeast, the Southeast and Texas.

Through the purchase, NRG gets a large presence in the lucrative Texas power market where, as an independent generator, it will not be tied to any particular utility and will be able to sell its power at wholesale to utilities and other retail suppliers. The deal also gives the private equity fund-owners of Texas Genco a profit of about six times their original investment of nearly $900 million, including the value of the investors' new 25% stake in NRG.

One controversial aspect of the power generating assets being sold under the deal is that the Texas customers of CenterPoint Energy Inc -- the Houston-based utility that originally sold the power plants to the private equity funds -- are obligated to pay more than $2 billion to make up the difference between what state regulators concluded that the power generating assets were worth and the higher book value that CenterPoint attributed to the assets. As a result, a fair question is how those supposedly undervalued assets could have appreciated in value so quickly, but the answer is simple -- the recent large increase in natural-gas prices. Since Hurricane Katrina hit the Gulf Coast in late August, natural gas prices are up more than 42% to $13.921 a million British thermal unit, which means that the price has nearly doubled for the quarter. Inasmuch as roughly half of the assets being sold consist of nuclear and coal-fired power plants that have low operating costs, NRG will be able to sell that power at the higher prices that gas-powered plants command because Texas allows power to be sold at the price commanded by the most expensive source.

Finally, in another reflection of the super-heated market for power generating assets, the Wall Street Journal is reporting today that Houston-based Reliant Energy Inc. will announce as early as today that it will sell $975 million worth of New York City power plants to a buyout group led by Madison Dearborn Partners and U.S. Power Generating Co. That deal will involve 23% of New York City's power-generating capacity.

Posted by Tom at 4:47 AM | Comments (1) |

October 2, 2005

2005 Weekly local football review

Bengals 16 Texans 10

The local media will likely view this game as a moral victory because the Texans (0-3) at least had a chance to win the game. However, the Texans passing game generated a measly 128 yards on a 4.9 yards per pass average. The rushing attack generated 126 yards for a slightly-better 5.5 per rush average. The bottom line is that 254 yards of total offense will not win many NFL games. The defense was decent, allowing less than 100 yards rushing and keeping the team in the game for the most part. But folks, this is shaping up as a very looong season for the Texans. The Texans better beat Tennessee at home next Sunday because they have Seattle on the road and Indianapolis at home the two weeks after that one. 0-6 is looking like a distinct possibility.

Raiders 19 Cowboys 13

That hissing sound is the air leaking out quickly of the Cowboys' (2-2) once promising season. The Pokes are now 2-2 and in the cellar of the strong NFC East Division. Dallas is not running the ball particulary well so far this season, and Drew Bledsoe is probably not capable of putting up the kind of passing statistics necessary to carry this team's offense. The Cowboys are light years better than the Texans, but this does not look so far like an NFL playoff caliber team.

Texas Longhorns 51 Missouri 20

Let's see now. Second-ranked Texas (4-0) has 14 penalties in the game, has two turnovers and a fumbled snap on a fourth down play near the goal line, and is only a point ahead after the first quarter on the road. Sounds as if they should be in trouble, right?

Nope. This is an exceptionally explosive Longhorn team, so it doesn't take them long to pile up the points. But the big hurdle for this team is directly in front of them this week in Dallas: The Horns face Oklahoma (2-2), which has won five straight games in the series, and UT coach Mack Brown must deal once again with the intimidation of being continually out-coached by Sooners' coach Bob Stoops. OU superback Adrian Peterson appears to have a hitch-in-his-giddyup and the Horns appear to have the much better balanced team, but you can throw out the statistics and record-to-date in this one. I think Texas will have all that it can handle in this one.

Texas Aggies 16 Baylor 10

I don't think this result is what Aggie (3-1) fans had in mind before their team goes on the road to face Colorado (3-1) and Kansas State (3-1) in two of the next three weeks. In fact, I'm sure it's not.

Houston Cougars 30 Tulsa 23

The hard-luck Cougars (2-2) get a nice road win after bailing out before Hurricane Rita and spending the week in a downtown Tulsa hotel. The Coogs play hurricane-displaced Tulane (2-1) in Lafayette, La. next Saturday.

UAB 45 Rice 26

The 0-3 Owls lose their ninth straight game stretching back to last season. The seat is getting very hot for Rice coach and genuine nice guy Ken Hatfield.

For more thorough analysis of the week's Big 12 games, check out Kevin Whited's weekly review.

Posted by Tom at 8:57 PM | Comments (6) |

Whew!

Well, as predicted, the Stros (89-73) didn't get to celebrate winning the National League Wild Card Playoff berth until the last out of their weekend series with the Cubs (79-83) was recorded in the scorebook.

The Stros clinched on Sunday by pulling out a heart-stopping 6-4 victory over the Cubs after setting up that victory with a similarly tight 3-1 win over the Cubs on Saturday. Preceding those nerve-wracking victories were two even closer games that the Stros lost to the Cubs, 3-2 on Thursday and then 4-3 on Friday in which Stros closer Brad Lidge uncharacteristically blew a two-run lead in the ninth. Lidge came back to save both wins over the weekend.

So, the Stros make the playoffs for the sixth time in the past nine seasons as they close out the remarkably successful Biggio-Bagwell era. I was one of the few to predict that this light-hitting club could contend for yet another playoff berth, although even I wavered during the early part of the season and as recently as a month ago. But after a horrible 15-30 record in their first 45 games, the Stros were a remarkable 74-43 for the remainder of the season to lock up the playoff berth with only three less wins that last season's club that came within a game of the World Series.

The Stros have a couple of days of rest before taking on their perennial playoff opponent, the Braves (90-72) in Atlanta on Wednesday. They will follow that game with another on Thursday in Atlanta and then games in Houston on Saturday and, if necessary on Sunday, and then a fifth game, if necessary, in Atlanta next Monday. I will post a thorough analysis of the Stros versus Braves series on Tuesday.

Posted by Tom at 8:01 PM | Comments (1) |

October 1, 2005

The real Republican deficit

Following on a theme addressed in this earlier post from last fall, this timely OpinionJournal op-ed points out that the real problem to the Republican Party represented by Tom DeLay is not his dubious ethics, but that he is devoid of ideas other than self-preservation:

The real danger for Republicans now isn't ethics; it is that, like those 1994 Democrats, they seem to have grown more comfortable presiding over the government than changing it. No one typified this more than Mr. DeLay, who has always been more fiercely partisan than he is conservative. . .

. . . [T]he GOP Congress has become mostly about its money and muscle--and the incumbency it helps to sustain. The policy and intellectual fervor, such as it was, has all but vanished. Nothing typified that more than Mr. DeLay's comments on September 13, when he declared post-Katrina that there was nothing left in the federal budget to cut. They had already trimmed all the fat. . .

Read the entire piece. As OpinionJournal points out, if voters come to the conclusion that the GOP's primary ambition is simply to remain in power, then "no amount of money or muscle will save Republicans at the polls."

Posted by Tom at 10:47 AM | Comments (1) |

Texas Medical Center players make nice

The Chronicle's Todd Ackerman, who has done a fine job over the past couple of years of covering the divisive split between former Texas Medical Center partners, Baylor College of Medicine and the Methodist Hospital -- reports today that Baylor and Methodist have entered into a settlement brokered by Texas Attorney General Greg Abbott and that Baylor and its new teaching hospital -- St. Luke's Episcopal Hospital -- have decided to shelve their ongoing merger negotiations for the time being.

Whew! Never a dull moment in the Medical Center, eh?

Mr. Ackerman reports that the Baylor-Methodist truce is centered around a new collaborative $16 million program between the institutions to improve immunization and emergency room programs for Houston's underprivileged:

"I have great respect for these institutions and am grateful we were all able to sit at the table to transform some serious differences into a cooperative environment of good will," said Abbott. "The ultimate goal is to ensure the highest level of care to the community, as well as to the neediest among us, especially the children of Houston."

The agreement also calls for Baylor and Methodist to renew a spirit of collaboration by agreeing to share teaching, research and clinical programs and to limit the recruitment of staff from one institution to another.

During the negotiations, chaired by former Harris County Commissioner and current Texas Medical Center board member Elizabeth Ghrist and attended by three members from both insitutions' boards, Abbott barred negative communication and recruiting of staff by either institution. He extended the negotiations, originally scheduled to finish at the end of August, through September, when he promised to make a pronouncement.

Friday, Abbott made that pronouncement. Joined by top officials of Baylor, Methodist and the Texas Medical Center, he said the new agreement ends the protracted dispute and marks "a new era."

The agreement between the institutions calls for 90 to 130 Baylor residents to rotate through Methodist for at least the next five years; for the two to share urology; ear, nose and throat; cardiovascular disease prevention; and cell and gene therapy programs; and for scientists at Baylor and at Methodist's new research institute to collaborate.

It calls for both institutions to attract new doctors and scientists to the Texas Medical Center rather than recruit from each other.

Given the raid on Baylor's faculty that Methodist engineered over the past year, it remains to be seen whether that last provision of the settlement holds up. However, Mr. Abbott's involvement in brokering the settlement certainly adds an element of governmental action that did not exist before in the various dust-ups that have taken place between the two institutions in their messy divorce.

Meanwhile, Mr. Ackerman reports that the Baylor-St. Luke's merger negotiations have been shelved on a friendly basis as the new partners assess their new medical school-teaching hospital relationship. That such negotiations have been put on hold is not particularly surprising given that such a merger would be highly unusual in the world of academic medicine between even longtime partners, much less ones that have been together for a less than a year. My sense is that the negotiations may revive as the parties get more comfortable with their relationship and evaluate how a merger could facilitate both parties' goals in the ever-shifting sands of financing and providing health care in the U.S.

Posted by Tom at 8:47 AM | Comments (0) |

KPMG moves to settle tax shelter class action

Battered and bruised after negotiating a deferred prosecution agreement with the Justice Department that narrowly prevented a criminal indictment of the firm, accounting giant KPMG LLP took another baby step yesterday in its plan to attempt to preserve the firm as a going concern by agreeing to submit a proposed $225 million settlement to the federal court overseeing the class action lawsuit by about 275 former KPMG clients who bought illegal tax shelters promoted by the firm. The Sidley Austin Brown & Wood LLP law firm -- another defendant with KPMG in the class action -- is also included in the proposed settlement, which remains subject to the U.S. District Court's approval in Newark, N.J. Here are the previous posts on the KMPG tax shelter fiasco.

Interestingly, lead plaintiffs' counsel in the class action is Milberg Weiss Bershad & Schulman LLP, which has a few problems of its own.

The proposed settlement covers former clients who participated in the tax shelters known as Blips, Flip, Opis, and SOS. The four shelters are the same ones that were the subject of KPMG's deferred prosecution agreement under which KPMG admitted criminal wrongdoing and agreed to pay about $450 million in penalties. A New York grand jury recently indicted eight former KPMG tax professionals and a former Sidley Austin attorney in connection with the promotion of the tax shelters. Under the proposed class action settlement -- which is scheduled for a preliminary hearing on October 7 -- KPMG would pay about 80% of the $225 million and Sidley Austin about 20%.

Even if approved, the settlement does not solve KPMG's tax shelter woes by any stretch because dozens of other former KPMG clients are pursuing their own individual lawsuits against the firm in various state and federal courts. There are approximately 325 former KPMG clients who bought the tax shelters who are not involved in the class action.

Cohen Milstein Hausfeld & Toll PLLC -- a law firm that has requested class action status for its own shelter lawsuit against KPMG -- has already filed an objection to the proposed settlement in which it requested a stay of the class action until the Court determines whether Milberg Weiss should be disqualified as lead plaintiffs counsel in the case. In the pleading, Cohen Milstein accuses Milberg Weiss of taking on a former KPMG shelter customer as an individual client three years ago and subsequently failing to notify the client that Milberg had begun negotiating the class action settlement with KPMG. Milberg filed the Newark class action lawsuit in June 2005.

Posted by Tom at 7:42 AM | Comments (0) |

September 30, 2005

The hypocrisy of Republican outrage over the DeLay prosecution

In reading the various Republican statements (see here and here) alleging that Travis County District Attorney Ronnie Earle is engaging in an outlandish abuse of power in regard to his decision to indict House Majority Leader Tom DeLay, a thought occurred to me.

For the past several years, the Justice Department under the Bush Administration has engaged in numerous and similar abuses of power. As a result, where is the Republican outrage over the sad cases of Daniel Bayly, William Fuhs, Arthur Andersen and Jamie Olis, to name just a few?

As I have noted many times, Sir Thomas More explains in the following passage from A Man for All Seasons why it is important to uphold the rule of law to constrain the abuse of overwhelming state power, even where doing so means that the Devil himself cannot be prosecuted unless he actually commits a crime:

"And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man's laws, not God's! And if you cut them down -- and you're just the man to do it, Roper! -- do you really think you could stand upright in the winds that would blow then?"

"Yes, I'd give the Devil the benefit of law, for my own safety's sake!"

The Bush Administration, Mr. DeLay and many of the Republicans who are criticizing Mr. Earle failed to uphold the rule of law in preventing prosecutions of business executives whose only "crime" was to be involved in arguably questionable business transactions that, at most, should have been the subject of civil litigation. Thus, the Republicans' irresponsible sacrifice of these executives' careers to the mantle of fickle public opinion has now contributed to the current environment where their own attempts to take advantage of loopholes in campaign finance laws is being criminalized.

Although abuse of state power against controversial politicians should not be condoned any more than abuse of state power against unpopular business executives, the Republicans' criticism of the DeLay prosecution rings hollow. They should have listened to Sir Thomas.

Posted by Tom at 7:11 AM | Comments (6) |

Assessing the hurricane damage to Gulf production facilities

Following on this post from yesterday, the markets continued to react to more information that indicates that damage to Gulf of Mexico offshore production and drilling facilities from the recent hurricanes is going to reduce production and exploration from that key region for an extended period of time.

That information, combined with the slow process of restarting Gulf Coast refineries, is generating one of the more unusual political ironies that America has seen in some time. As a result of the restricted energy supplies from the Gulf region, the outspokenly pro-exploration and production Bush Administration is sounding eerily like the Carter Administration from the late 1970's, promising a national energy-conservation campaign to give Americans tips on saving energy during the winter heating season.

Actually, markets are still trying to adjust to the news of the restricted supplies. Gasoline and heating-oil futures settled lower on the New York Mercantile Exchange yesterday, but front-month crude oil contracts posted a 44 cent rise to $66.79 a barrel -- its highest level in over a week -- although forward month oil contracts were lower. After increasing almost 8% during Wednesday trading, October gasoline settled down about 4% to $2.2516 a gallon and October heating oil fell 1.64 cents to $2.1247 a gallon. November natural-gas futures continued their relentless increast as they rose 9.6 cents to $14.196 per million British thermal units.

The double whammy of Hurricanes Katrina and Rita has not only damaged the Gulf's production and drilling infrastructure, it has damaged the important service industry that provides key logistics support for the offshore exploration and production industry. Helicopters at this point are in such demand that they are nearly impossible to find and many Louisiana dock facilities that used to launch supply boats to the Gulf have been destroyed. Service companies are even having a difficult time finding enough employees to meet the demand for assessment and repair service. This lack fo workers, helicopters and equipment is hampering the damage assessment process with regard to offshore oil and natural-gas facilities, most of which remains shut down nearly a week after Hurricane Rita came ashore last Saturday morning. The Gulf of Mexico accounts for roughly one-quarter of U.S. oil and natural-gas production.

Even when existing production is restarted, the hurricanes have damaged so many drilling rigs that efforts to increase Gulf production of oil and natural gas will likely be severely hampered. Current assessments are that the two hurricanes either sank or seriously damaged 13 drilling rigs, which is 12% of the Gulf rig fleet. As a result, that will make drilling more expensive, adding yet another element to the upward pressure on energy prices.

Finally, although Houston area refineries are firing up operations, the seven refineries in the hard-hit Port Arthur and Lake Charles areas will probably take longer than initially thought because of problems in getting reliable power to those facilities. About 20% of U.S. refining capacity was shut down for at least some period of time by the hurricanes.

Posted by Tom at 6:00 AM | Comments (1) |

Langone unmasks the Lord of Regulation

You remember Kenneth Langone, don't you?

Mr. Langone is the co-founder of Home Depot who chaired the New York Stock Exchange compensation committee that approved Richard Grasso's $140 million pay package. As a result, he is a defendant along with Mr. Grasso in New York Attorney General Eliot Spitzer's lawsuit to recover alleged overcompensation paid by the NYSE to Mr. Grasso. As this previous post from over a year ago indicates, Mr. Langone does not think much of Mr. Spitzer's lawsuit.

Well, in this delicious follow-up OpinionJournal op-ed, Mr. Langone updates us on Mr. Spitzer -- who he calls "the full-time New York state attorney general and part-time fund-raiser for his political ambitions" -- and his use of the high-profile lawsuit against Messrs. Grasso and Langone to promote his political career.

First, Mr. Langone notes Mr. Spitzer's inflammatory public statements regarding Mr. Langone at the outset of the litigation (a favorite Spitzer tactic):

A little more than a year ago I was obliged to defend myself publicly against a legal smear. Eliot Spitzer, the full-time New York state attorney general and part-time fund-raiser for his political ambitions, called me "unsavory," "deceptive" and "tainted." When many in the media were uncritically swayed by his posturing, Mr. Spitzer then pledged to "put a stake through" my heart.

This metaphorical threat to my cardiovascular system aside, the occasion for all this brash talk was the attorney general's assertion that I was a lawbreaker. I tricked some of Wall Street's keenest minds, so the accusation goes, into approving a portion of Dick Grasso's compensation when he headed the New York Stock Exchange.

Then, Mr. Langone proceeds to review what has been learned through the discovery process in the lawsuit so far:

[The other NYSE board members'] testimony is clear and consistent. Of the six directors deposed thus far who served on both the compensation committee and the full board, each has said they were not deceived in any way. They all confirm that, as head of the NYSE compensation committee, I provided them and the board with complete and accurate information about Mr. Grasso's proposed compensation--and that they approved it.

Pressed for examples, they cited one-on-one meetings with compensation experts, committee meetings, conference calls, comprehensive written documentation, full board meetings, as well as annual presentations I gave both to the committee and the board that included detailed handouts and unfettered opportunity for discussion and debate.

And, contrary to Mr. Spitzer's statements at the outset of the case, what has been Mr. Spitzer's reaction to discovery of this information? Mr. Langone lays the wood to the Lord of Regulation:

And confronted with these hard facts in full view, Mr. Spitzer's public response was flat, total silence.

Since the attorney general seems to be lying low of late--no more press releases every time he goes to the water cooler--allow me to summarize.

Here's a case alleging deception, in which nearly everyone involved says that the full details were provided repeatedly. The public official who brought the case has indulged garish profiles of himself to publications like Vanity Fair, People and New York magazines, while at the same time resisting scrutiny of key facts in the case. And while his office recently said it is low on funds to pursue Medicaid fraud, he is devoting multiple lawyers to this case -- which will benefit the state not one nickel. Medicaid spending by the way costs this state more than a quarter of its budget, in excess of $40 billion.

Mr. Langone concludes by boring in on the lack of judgment and troubling tactics that have been a consistent theme of prosecutions of unpopular business executives during this post-Enron era of criminalizing merely questionable business judgments:

The reliability of Mr. Spitzer's judgment, . . . should be an issue of prime concern when those votes are cast. But he also has a troubling method of making loud legal threats, strong-arming witnesses, and intimidating boards and companies into destructive concessions. . . Coercing settlements through fear, as anyone can see, is far different from delivering justice.

Read the entire piece. It is a wonderful unmasking of one of the most insidious demagogues on the current American political scene.

Update: Bill Dyer notes and comments on one of the more frightening NY Times articles of the year.

Posted by Tom at 5:47 AM | Comments (0) |

An interesting perspective

It is becoming clearer each day now that at least a substantial amount of the initial information coming out of New Orleans in the aftermath of Hurricane Katrina was either exaggerated or misinformation. One such piece of misinformation was that large numbers of murders were occurring as a result of gunshots.

Commenting yesterday on the fact that only seven gunshot victims had been identified in the autopsies done on the first 650 or so bodies recovered from New Orleans, Coroner Frank Minyard made the following observation:

"Seven gunshots isn't even a good Saturday night in New Orleans."

Posted by Tom at 5:21 AM | Comments (0) |

September 29, 2005

Market responds to Rita-related damage to Gulf production facilities

Following on this post from yesterday, Chevron Corp.'s announcement that its Typhoon tension leg platform was severed from its moorings by Hurricane Rita and is floating upside down in the Gulf of Mexico dovetailed with the news that natural-gas futures on the New York Mercantile Exchange skyrocketed 10% to almost $14 per million British thermal units, which is its highest closing on record.

Thus, if it's going to be a long, cold winter in the U.S. hinterlands this winter, then it's looking increasingly as if it's going to be a long, cold, expensive winter.

Natural-gas futures on the Nymex for delivery in October rose $1.251 to $13.907 per million BTUs. The expiration of the October contract at the same time that the delivery point for Nymex futures, Louisiana's Henry Hub, which has been closed down for the past week, added to the uncertainty and volatility in the market.

As a result, the Natural Gas Supply Association -- an association that represents producers and marketers -- issued this alert (pdf) that colder weather in the East combined with hurricane-related supply disruptions along the Gulf Coast will likely translate into substantially higher natural-gas prices across the U.S. this winter. The damage from the two major hurricanes in the Gulf over the past month have delayed or halted production of about 5% of the annual U.S. production of natural gas from the Gulf of Mexico, and that reduction in domestic natural gas production cannot be readily replaced with imports.

As for the Typhoon platform, it is floating upside down after the deep-water facility took a direct hit from Rita. Although Chevron has not announced whether the massive platform can be salvaged, my sense is that it's probably a total loss because its engines, pumps and living quarters are probably unsalvageable. The Typhoon is located in 2,000 feet of water in the Green Canyon area approximately 165 miles south-southwest of New Orleans.

Along those same lines, The Oil Drum provides this summary of the status of the known damage to drilling and production facilities in the Gulf of Mexico.

Posted by Tom at 9:50 AM | Comments (1) |

Paul Burka on the Houston evacuation plan

Following on previous posts here and here regarding Houston's hurricane evacuation plan, Texas Monthly editor and former Houstonian Paul Burka weighs in on the plan in this OpinionJournal op-ed. Mr. Burka does not offer anything new here in terms of a solution, but he does do a good job of framing the key issue:

There is no way that government can assure that the people on the roads are the ones who are in the most danger, those from Galveston and the low-lying areas near Galveston Bay. Common sense needs to be restored to the evacuation process, so that people with the greatest risk of danger will make the decision to leave, and those with the least risk will stay off the roads.

Tory Gattis over at Houston Strategies also has some good thoughts on how to improve the plan.

Posted by Tom at 7:27 AM | Comments (0) |

A key tip for dealing with rattlesnakes

One of the best parts of the Houston Chronicle for many years has been the newspaper's Hunting and Outdoors section of its sports section. Inasmuch as my reaction to finding a rattlesnake would have been the same as the fellow's reaction as described in the following Chronicle article, I was glad to learn something from the Chronicle piece about dealing with dead rattlesnakes:

Even a dead rattlesnake can hurt you. Just ask Trey Hanover of College Station.

On Labor Day weekend, Hanover and his father, Tommy Hanover, were working on their deer lease when they killed a big rattler. They shot the snake's head off with a shotgun and loaded the carcass in the truck to show other hunters on their lease that they needed to be careful.

"We hung the snake on the fence at the camphouse," Tommy Hanover said. "When we got ready to leave, Trey picked up the snake and threw it out in the pasture for the buzzards to eat."

By the time he'd driven to College Station, Trey Hanover's eyes were very irritated. By the next morning, his eyes were swollen shut. The doctor who examined Hanover said it looked like he'd suffered a chemical burn.

It took them a while to figure out that the shotgun load that vaporized the rattlesnake's head splattered the snake's venom over its body.

When Hanover handled the snake, he got the venom on his hands and later rubbed it in his eyes, made itchy by dust and ragweed. Sixteen days later, the vision in his right eye was back to normal. His left eye was still a little cloudy, but the doctor thought it would return to normal as well.

"We learned a valuable lesson about handling rattlesnakes — even dead ones," said Tommy Hanover.

Posted by Tom at 7:03 AM | Comments (1) |

Stros close in on another playoff berth

After a 6-3 road trip that included a two-game sweep of the Cardinals, the Stros (87-71) come home for four games with the Cubs (77-81) needing any combination of wins or Phillies (85-74) losses equaling two to achieve the club's sixth playoff berth in the past nine seasons (the Phillies finish the season with three games in Washington against the 81-78 Nationals). Inasmuch as the Stros have gone a positively unbelievable 72-41 after a miserable 15-30 start to the season, one has to feel good about the Stros' chances of clinching the playoff berth at this point. However, given this club's chronic lack of hitting, it is reasonable to hold off celebrating until the final out of the clinching game is officially in the scorebook.

The Stros' successful road trip was the primarily the result of this team's strength -- strong pitching. The pitching staff's runs saved against average ("RSAA") is 92, second best among the 16 National League teams. Moreover, the hitting has also picked up of late as the club's four strongest hitters -- Morgan Ensberg (40 RCAA/.390 OBA/.567 SLG/.957 OPS), Lance Berkman (35/.413/.521/.934), Bidg (9/.325/.464/.790) and Jason Lane (5/.316/.501/.817) -- have all stepped up when it counted on the just-finished road trip. Even Mike Lamb -- who has had a generally horrible season (-13/.280/.413/.693) -- has had a robust 7 RCAA since September 5th and Brad Ausmus -- one of the worst hitting regular National League hitters over the past several seasons (-13/.353/.334/.688) -- has had a relatively Bondsian 4 RCAA since August 15th. As a result, the club's team runs created against average ("RCAA") has risen to -23, which is 12th in the National League. Nevertheless, reflecting just how remarkable this season has been, the Stros combined RCAA/RSAA of 69 still trails the Phillies combined RCAA/RSAA of 81, which means that the Phillies are really the better-balanced club. Just goes to show that great pitching can cover up a lot of warts.

It would be nice if the Stros could wrap up the playoff berth on Thursday or Friday so that they could rest the Rocket and Roy O in the weekend games, but don't bet on it. This club has had to fight and struggle for everything that it has achieved, so it would be fitting for this bunch to have to play a couple more heart-pounders before finally clinching the National League Wild Card Playoff berth.

Posted by Tom at 4:35 AM | Comments (0) |

The Hammer's indictment

In one of the least surprising developments in Texas politics over the past couple of years, a Travis County (Austin area) grand jury on Wednesday charged Houston Congressman and House Majority Leader Tom DeLay and two political associates -- John Colyandro, former executive director of the Texas political action committee that Mr. DeLay helped form, and Jim Ellis, who heads Mr. DeLay's national political action committee -- with criminal conspiracy in an alleged campaign finance scheme that has been under investigation for almost two years. That investigation and Mr. DeLay have been frequent topics on this blog, as posts here, here, here, here, here, here, here, here, here, and here reflect. Here is a copy of the indictment.

In a press release and news conference on Wednesday afternoon, Mr. DeLay insisted he was innocent and called Travis County District Attorney Ronnie Earle a partisan fanatic, which is not a compelling criticism of Mr. Earle. Nevertheless, Mr. Earle has made some imprudent public statements about Mr. DeLay during the investigation. By the way, Fred Graham of Court TV made one of the funniest comments that I've heard on television recently when, after hearing Mr. DeLay's press release and news conference, he observed "if a press release could froth at the mouth, this would be foaming."

Criminal conspiracy is a state felony punishable by six months to two years in a state jail and a fine of up to $10,000. The indictment forced Mr. DeLay to step down temporarily as House Majority Leader under House Republican rules.

Although a bit skimpy on the allegations relating to specific criminal acts, the indictment accuses Mr. DeLay of a conspiracy to "knowingly make a political contribution" in violation of Texas law outlawing corporate contributions. It alleged that DeLay's Texans for a Republican Majority political action committee accepted $155,000 from several companies, deposited the money in an account, wrote a $190,000 check to an arm of the Republican National Committee and then provided the committee with the names of Texas State House candidates and the amounts they were supposed to received in donations. Thus, Mr. Earle is apparently contending that the Texas PAC simply used the GOP National Committee organization as a conduit to funnel the illegal corporate contributions to the GOP candidates. The indictment against Mr. DeLay came on the final day of the grand jury's term and followed earlier indictments of a state political action committee founded by Mr. DeLay and three of his political associates.

The background of this mess harkens back to 1990 or so when the re-energized Republican Party in Texas decided that it could wrest the Texas House away from the Democratic Party. GOP party leaders aimed to take control in the 2000 so that the House, the Senate and the state's Republican governor could have control of redrawing the state's congressional district lines when the Legislature met after the 2000 census. After spending an extraordinary amount of money, the GOP fell short in 2000 and the Democratic House speaker refused to go along with the governor and Senate's effort to reconfigure the state's district lines so that a half-dozen more congressional seats could be won by Republicans.

That's when Mr. DeLay went to work. He created a political action committee in Texas that was modeled on his own very successful national PAC. Texans for a Republican Majority was equally successful, raising $1.5 million and electing 15 or so new Republican members to the state House. Thus, the GOP took control of the Texas House for the first time in about 125 years and then, with a GOP Texas House Speaker, Mr. DeLay oversaw the redrawing of the state's congressional districts that provided the GOP with I believe six new seats in Congress.

However, at the end of the day, this is a very weak indictment. From a strategic standpoint, Mr. Earle doesn't want to show too much of his hand at this point, but a prosecutor should be required to state with a fair degree of specificity the criminal acts that he contends occurred. Mr. Earle has not done that in regard to Mr. DeLay in the current indictment.

By the way, Mr. DeLay has purchased a first-rate defense team, which includes well-known Houston defense attorney, Dick DeGuerin. You may recall that Mr. DeGuerin recently obtained a rather extraordinary acquittal for a client who had far more difficult problems than Mr. DeLay does.

Finally, Dick DeGuerin -- like Mr. Earle, the prosecutor -- is a Democrat. So, one of the leading Republicans in the U.S. Congress is going to be prosecuted and defended by Democrats.

Only in Texas. ;^)

Local Houston blogger Charles Kuffner has followed the DeLay case closely, and is a very good informational resource on the background of the investigation.

Update: Professor Bainbridge adroitly sums up his feelings about the DeLay affair with a joke that is as good as Fred Graham's above comment on the DeLay news conference.

Posted by Tom at 4:04 AM | Comments (10) |

September 28, 2005

Guaranteeing expensive natural disasters

In his Wall Street Journal ($) Business World column today, Holman Jenkins picks up on a theme of several previous posts (here, here, here and here) that point out that governmental policies that distort risk analysis virtually guarantees that natural disasters in hurricane-prone areas will be increasingly costly:

Louisiana's Sen. Mary Landrieu offered a perfect expression on CNN on Sunday of where the new blank-check compassion is leading us: "Wolf, poor families were crushed. Middle-income families are staggering. And wealthy families have been just punched in the stomach. It is going to take a huge national effort for us to realize the importance of this Gulf Coast region."

To wit, everyone must be restored to their previous status and possessions, or better, at taxpayer expense.

Nobody criticized the handouts to New York after 9/11, which ratcheted up expectations of unlimited federal payouts when bad things happen on a large scale. Victim families got seven-figure checks because their loved ones died in a televised tragedy, though similar bounties aren't bestowed on families that lose loved ones in less visible tragedies.

This precedent has returned to haunt us on a giant scale in New Orleans and its hinterland. Why are such selective windfalls to the unfortunate necessary? The federal government already guarantees us retirement income and health care in old age; it provides insurance and health care for the poor. These commitments in excess of $70 trillion, if properly recognized, would have long ago brought the country up before a bankruptcy judge.

It would be insane, under the circumstances, to extend this safety net to subsidize entire regions that wish to build without making proper allowance for predictable geological and meteorological hazards. This is insurance not for life and health, but for "lifestyle," with the biggest benefits flowing to the least needy.

Sen. Landrieu and her Louisiana colleague, Republican Sen. David Vitter, have drawn up a bill for $40 billion in Corps of Engineers projects to encourage southern Louisiana to imagine itself immune to the weather. With near certainty, such a boondoggle would be the best way to guarantee an even more expensive disaster in the future.

Posted by Tom at 5:49 AM | Comments (0) |

Rita hammers offshore production facilities

This Financial Times article reports that preliminary assessments of the damage that Hurricane Rita caused to offshore oil and gas drilling and production facilities reflect that the damage is greater any other storm in history.

Rita's path -- which was west of the path of Hurricane Katrina last month -- tore through an area of the Gulf of Mexico that contained a large amount of exploratory rig activity. Given the apparent damage to the rigs, the biggest impact from the storm may be that it will exacerbate an already tight market for rigs in the region. As a sign of just how precious rigs are becoming to the market, The Woodlands=-based Anadarko Petroleum Corp., one of the biggest U.S. independent exploration and production companies, raised eyebrows in the energy industry earlier this week by committing to a rig six years in advance.

Oh, how times have changed in the exploration and production business.

Posted by Tom at 5:21 AM | Comments (0) |

September 27, 2005

Comparing planning for impending Gulf Coast threats

Joel Kotkin is an Irvine Senior Fellow at the New America Foundation and is the author of The City: A Global History (Modern Library, 2005). In this Opinion Journal op-ed, he compares the disparate preparations of New Orleans and Houston to the two recent hurricanes, and makes several useful recommendations regarding planning for natural disasters and development of urban areas on the Gulf Coast, including the following:

[The Gulf Coast region], with the notable exception of New Orleans, is one of the fastest growing in the U.S. Its relatively low costs and balmy climate have turned it into the "opportunity coast." Yet clearly the Gulf's history has shown that ignoring nature has its perils. Few now remember Indianola, south of Houston. Until it was wiped out by hurricanes, first in 1875 and then again in 1886, it was Texas's second-largest port. Today, most of that city lies under water.

The other, better-known case, is Galveston. Before a 1900 hurricane--which took 6,000 lives--it was the premier port and commercial center on the Texas coast. After the hurricane, the flow of commerce shifted inexorably to inland Houston, which was, and remains, better protected from the Gulf's annual tantrums. Such lessons should guide development along the Gulf in the coming years. For one thing, it may make sense to use marketplace mechanisms -- in the form of insurance premiums -- to let developers accurately assess the risk of new development. After all, federal assistance may be limited in the future. Some places may need to be abandoned. Whole towns already have been demolished for safety reasons in parts of the Mississippi flood plain as have homes in some of the riskier parts of east Texas. Programs to buy houses from existing residents, move towns to higher ground and create new greenbelts, will benefit the environment--not to mention the taxpayers--by relieving them of the burden of subsidizing repeatedly flooded areas.

A less extreme but equally sensible course can be applied throughout the Gulf region by steering new development--through either environmental or insurance restrictions--further out into the interior.

More broadly, as a nation, we may want to consider ways to encourage greater development further inland. Americans have been crowding into the coasts for generations, even though one of our great assets is the broad interior hinterland. Our continued population growth -- from 310 million now to 400 million by 2050 -- may make repopulating the hinterlands more economically viable. Instead of offering "homesteads" or funds for repeated rebuildings on the crowded, and sometimes dangerous, coasts -- particularly in below-sea-level New Orleans -- it might make more sense to encourage settlement and investment deeper into our nation's interior.

This was the essence of much of 19th-century federal policy, which gave incentives for canals and railroads, as well as providing cheap or free land on the Plains. This could also bring new life to parts of country that have been losing jobs and people for a generation, but may now be ready for revival. With the Internet and small-jet travel, some of these areas, such as the Dakotas, are already showing signs of becoming more competitive in the national and global economy. It is a trend worth boosting, and may come to be the most attractive strategic lesson to emerge from Katrina and Rita.

Read the entire piece. Mr. Kotkin makes a valid point, which is that the federal policy promoting development of coastal areas -- accomplished through such mechanisms as federal subsidies of flood insurance and related federal bailouts of storm-ravaged areas -- distorts rational economic decision-making. Let's rebuild New Orleans, but on a rational basis and without the distorted decisions that often result from the incentive to grab well-intended but counterproductive federal handouts.

Posted by Tom at 7:33 AM | Comments (0) |

More trouble for DeLay friend?

This NY Times article reports that the Justice Department's inspector general and the F.B.I. are looking into the November, 2002 demotion of Frederick A. Black, a veteran federal prosecutor whose reassignment shut down a criminal investigation that he had been pursuing of Washington lobbyist Jack Abramoff. Mr. Abramoff is a well-known Washington lobbyist and a major Republican Party fund-raiser who is a close confidant of Houston congressman and House Majority Leader, Tom DeLay. Here are the previous posts relating to a broad corruption investigation of Mr. Abramoff focusing on accusations that he defrauded Indian tribes and their gambling operations out of millions of dollars in lobbying fees.

The focus of this newly-revealed investigation is different from the broader corruption probe involving Mr. Abramoff. In this case, the subject is Mr. Black's demotion only days after he had notified the department's public integrity division in Washington that he had opened a criminal investigation into Mr. Abramoff's lobbying activities for federal judges in Guam, who had sought Mr. Abramoff's help in blocking a bill in Congress to restructure the island court system. In addition, Mr. Black was subsequently blocked from participation in public corruption cases after his demotion. According to the Times article, no evidence has been uncovered to date that indicates that any Justice Department official took the action against Mr. Black in response to any communication from or on behalf of Mr. Abramoff, and evidence does exist that the Bush Administration had been preparing to install a permanent U.S. Attorney to replace Mr. Black at the time.

Nevertheless, the timing of Mr. Black's demotion sure stinks. Stay tuned.

Posted by Tom at 6:49 AM | Comments (1) |

Rita damage taxes power grid

On the heels of Entergy Corp.'s decision to place its New Orleans subsidiary in bankruptcy last week on the day that Hurricane Rita barreled into the Gulf Coast at the Texas-Louisiana border, the utility is now dealing with serious damage to its power infrastructure that is threatening to stall the recovery effort in East Texas from the storm.

On Monday, Entergy's Texas subsidiary commenced rolling blackouts in the area of far north Houston that it services, including The Woodlands. The move was made to reduce stress on the utility's damaged electrical system after Hurricane Rita and related tornadoes downed power lines and disabled most of the utility's power plants. A total of almost 1.25 million accounts were without power as of Monday in East Texas and Western Louisiana.

One of the biggest problems facing Entergy is the damage to the company's huge Roy S. Nelson power plant near Lake Charles, which suffered substantial damage during the hurricane. That plant generates power for a large part of Entergy's service area in East Texas and Western Louisiana, and the high voltage power lines that carry the power throughout the region were so badly damaged in the storm that Entergy is having problems getting electricity to some parts of its Texas service area. Entergy announced that it was about 30% short of the power it needs to meet the local needs of a four county area that it serves in the far north and east areas of Houston because only three of the 13 power plants that the utility normally relies upon were in a position to furnish power yesterday. As a result, the company initiated the rolling blackouts on a day in which temperatures in the area were around 100 degrees, and those blackouts will continue indefinitely.

Outages in the areas serviced by Entergy are more severe than in Houston. Inasmuch as Entergy draws its power from the giant electric network known as Eastern Interconnection, its power base had been hit hard by both Hurricanes Katrina and Rita. In contrast, Houston draws its power from companies within the Electric Reliability Council of Texas ("Ercot"), which escaped from Rita relatively unscathed. Texas has maintained its transmission system and power plants as a separate grid in order to keep that system under state control, whereas the system from which Entergy draws power is an interstate system that is regulated by the Federal Energy Regulatory Commission.

As of Monday, Entergy reported over 650,000 metered accounts in Louisiana and Texas that were without power as a result of damage from the two recent storms.

Posted by Tom at 6:18 AM | Comments (1) |

September 26, 2005

What's really going on over at Texansville?

Kevin Whited over at blogHouston.net has this interesting post chronicling the trial balloons that are being floated out of the Houston Texans' camp these days as various coaches and management figures attempt to deflect criticism for the team's absolutely horrendous start to the 2005 season.

Although the Texans have a myriad of problems, it appears reasonably clear that the biggest one is that they do not have enough good players. That problem falls squarely in the lap of General Manager Charlie Casserly, whose golden touch with the media has been much better than his coordination of choosing the team's players. The good news is that the Texans are almost $10 million under the NFL salary cap. Moreover, even with the almost certain decision at this point to exercise an $8 million option on under-performing QB David Carr's contract for next season, the Texans should still have plenty of room under next season's salary cap to attract some good offensive and defensive linemen during this upcoming off-season. The key question that Texans owner Bob McNair has to address is this:

Given the below-average nature of the player selections made to date, should Casserly be in charge of making the next round of player selections for the team?

Posted by Tom at 8:27 AM | Comments (0) |

Throwing money at All the King's Men

John Fund explores in this OpinionJournal piece the risk that long-standing Louisiana elements of corruption are likely to hijack a good part of the extraordinary amount of federal aid that will be flowing into the state in the wake of Hurricane Katrina. That reality is likely not going to stop or slow the flow of such aid because, as William Easterly points out in this Foreign Policy (pdf) piece, such aid has the following beneficial effect:

The poor have neither the income nor political power to hold anyone accountable for meeting their needs--they are political and economic orphans. The rich-country public knows little about what is happening to the poor on the ground in struggling countries. The wealthy population mainly just wants to know that "something is being done" about such a tragic problem as world poverty. The utopian plans satisfy the "something-is-being-done" needs of the rich-country public, even if they don't serve the needs of the poor.

Confronted with this confounding state of affairs, Stephen E. Landsburg proposes this innovative choice for spreading the federal aid to the victims of Katrina:

Before we spend $200 billion on New Orleans disaster relief, can we just pause for about three seconds, please? That should be long enough to divide one number by another. The numbers I have in mind are, on the one hand, $200 billion, and, on the other hand, 1 million people—the prestorm population of the New Orleans area, broadly defined.

Two-hundred billion divided by 1 million is 200,000. For the cost of reconstructing New Orleans, the government could simply give $200,000 to every resident of the region—that's $800,000 for a family of four. Given a choice, which do you think the people down there would prefer?

Based on my anecdotal experience in talking with New Orleans evacuees during Houston's relief effort, I can say unequivocally that every evacuee would prefer to receive direct aid over throwing federal relief funds into the black hole that is Louisiana state government.

Hat tip to Arnold Kling for the lines to the Easterly and Landsburg pieces.

Posted by Tom at 7:27 AM | Comments (0) |

Mississippi's AG increases the cost of rebuilding

This previous post explored the role of federally-subsidized flood insurance in attracting capital investment in New Orleans that probably would not have occurred had the owners of the capital been faced with paying the cost of private flood insurance. Until Hurricane Rita developments took us a bit off track, I had been meaning to pass along this NY Times article about a batch of lawsuits by plaintiff's lawyers and Mississippi Attorney General Jim Hood that seek to eviscerate flood exclusion provisions in homeowner's liability insurance constracts and make the insurers responsible for damages caused by flooding from Hurricane Katrina For those of us who prefer to pay less rather than more for such insurance, these lawsuits are a real bad idea, as the following and this OpinionJournal piece explain.

Insurers have long had flood exclusions in their insurance contracts, which is one of the primary reasons why the federal government got into the business of subsidizing flood insurance in the first place. The reason for this is that floods are not a typical insurable risk, which insurers normally spread among a large pool of insureds who are subject to the risk through collecting premiums from that pool. Insurers then use the premium funds from that pool to compensate the relatively few who actually suffer accidents from the risk. Floods are also not a typical insurable risk because the only people who buy flood insurance are those who are likely to be flooded, which makes it impossible to spread risk over a large enough pool of insureds. Finally, floods tend to be widespread and recurring, so they cause huge losses that require equally huge pools to cover the losses. That's why private flood insurance is very expensive.

However, Attorney General Hood is now attempting to set aside these flood exclusions in private insurance contracts in the wake of Katrina as being "unconscionable." Similarly, well-known Mississippi plaintiff's lawyer Dickie Scruggs is following up with other lawsuits in which he contends that the insurers engaged in deceptive trade practices by excluding flood coverage arising from storm surge from their contracts. Messrs. Hood and Scruggs are taking these positions despite the fact that federally-subsidized flood insurance has been promoted in the region for about 40 years and relatively few Mississippi coastal residents have bothered to buy it, presumably because either they did not want to pay extra for it or they assumed that the feds would bail them out in the event of a Katrina-like catastrophe, anyway.

So, Messrs. Hood and Scrugges are demanding that private insurers pay for Katrina flood damages even though the insurers never collected any flood premiums over the years and thus, have no such reserves dedicated for that risk. Inasmuch as insurers are already liable for an estimated $50-70 billion in insured losses, adding another $15-20 billion in uninsured flood losses would ensure that at least a few insurers would end up in chapter 11.

But there would be even a more draconian result if Messrs. Hood and Scruggs are successful in their lawsuits. Insurance companies would have to assume that flood risk is a part of the insured risk, regardless of the exclusions in the insurance contracts. Consequently, the insurers would either charge you and me higher premiums -- certainly at least hundreds of dollars annually -- to cover this risk, or they could simply stop writing policies at all in the Gulf Coast region. That would reduce the competition among insurers to provide policies to all of us, which would also ratchet up the cost of such insurance.

Finally, one has to ponder how Mr. Hood -- a governmental official who has at least an indirect responsibility to encourage reconstruction of the battered regions of his state -- rationalizes taking actions that will increase the cost of liability insurance and thus, make it more expensive for Mississippi citizens to rebuild. Hopefully, a common sense opponent to Mr. Hood will appear in the campaign for the next election who will point that out to Mississippi voters.

Update: Professor Ribstein notes the even wider impact of the Mississippi insurance lawsuits on respect for the rule of law:

[N]obody’s safe if courts don’t enforce contracts. How could the insurance industry ever be sure it was excluding a risk if can't enforce this clearest exclusion of all? How could any company ever be sure it was limiting the scope of any promise?

Doug Simpson over at Unexpected Consequences also reviews the effects of the Mississippi insurance lawsuits.

Posted by Tom at 6:10 AM | Comments (0) |

September 25, 2005

Rita's expected economic waves turn into ripples

It's been a helluva past month in Houston.

First, the Houston community responded to the worst natural disaster in America in decades by taking in tens of thousands of evacuees (posts here, here and here) from New Orleans and the central Gulf Coast who had almost everything but their lives. Then, as that relief effort was winding down, Houston confronted Hurricane Rita, a category 5 storm bearing down for a direct hit on the city. Implementation of the city's evacuation plan led to an estimated 2.7 million Houston area residents hitting the road, resulting in unprecedented traffic gridlock and gasoline shortages throughout the region. After Rita veered off to the east to make landfall on the Texas-Louisiana border, Houston is now dealing with the not insubstantial problem of how to have 2.7 million people return to their homes in the region without experiencing the same type of gridlock and shortages that occurred when they left.

Whew!

Despite all that, the initial signs are that the feared economic repurcussions of damage from Hurricane Rita will not be all that bad. Damage to the vital concentration of oil refineries along the Texas coast appears to be relatively light, and U.S. Coast Guard aerial reconnaissance of the Ports of Houston, Galveston and Port Arthur and their related shipping lanes showed few problems as a result of the hurricane. The biggest problem at the Port of Houston is that the winds out of the north as the storm pushed onshore pushed water out of the Houston Ship Channel and Galveston Bay so that those relatively shallow waterways do not have enough water to accomodate deep sea vessels at this point. However, the water levels should should return to normal levels by Monday or Tuesday, so no substantial disruption in Port operations are expected.

Inasmuch as prices for gasoline and diesel fuel would rise if Houston-area refineries and ports are slow to resume operations, the light damage reports were good news for markets that are still recoiling from the economic impact from the damage to the New Orleans area from Hurricane Katrina.

However, even without extensive damage to refineries and Gulf oil and gas production facilities, the energy industry's pre-Rita shutdown will at least stretch gasoline supplies for the next several weeks. Sixteen refineries were shut down in anticipation of Rita, and that accounts for almost 25% of U.S. refining capacity. That's nearly twice as much of the U.S. capacity that was shutdown prior to Hurricane Katrina, and only about half of that capacity affected by Katrina has come back on line. It normally takes between a week and two weeks for a shutdown refinery to resume normal operations.

Nevertheless, good news emanated on Saturday from the Houston area refineries. Exxon Mobil Corp.'s Baytown plant, which is located between Port Arthur and Houston and is the nation's largest, announced that it planned to restart a number of units beginning today. Terminals and pipelines have already reopened, and the 557,000 barrel-a-day refinery is already delivering gasoline out of storage. Similarly, Royal Dutch Shell PLC announced Saturday that its 340,000 barrel-a-day Deer Park refinery near Houston was not damaged and that both its North Houston and Pasadena distribution terminals are fully operational. BP PLC's huge Texas City refinery is thought to be in the process of restarting, while the smaller Marathon Oil Co. and Valero Energy Corp. refineries in Texas City were also moving towards restarts after reporting no serious damage.

The initial damage reports are worse from the refining area near the Texas-Louisiana border where Rita made landfall. The Port Arthur-Beaumont area has four refineries and Lake Charles, La. just across the border has three plants. Although damage assessments are still ongoing at those plants, the restarting of those plants will take longer both because of probable greater damage than to the Houston area plants and the lack of power, which will probably not be remedied until later in this week.

As a result of the foreoing, crude oil futures fell sharply in unusual Sunday trading as it appeared that oil rig and refinery damage from Hurricane Rita was less than originally feared. Oil prices had climbed steadily last week as Rita churned through the Gulf of Mexico as a category 5 and then 4 hurricane, but fell Friday as the storm weakened before its early Saturday morning landfall just south of Sabine Pass, La. A barrel of light sweet crude for November delivery was down $1.40 at $62.80 on the New York Mercantile Exchange, and unleaded gasoline fell 10.46 cents to $1.98 per gallon. Sunday trading via the Nymex electronic Access system and on London's International Petroleum Exchange was arranged late last week in an effort to mitigate energy market volatility resulting from Hurricane Rita. However, the lack of damage to the facilities appears to have deflated interest in early trading. On London's IPE, Brent crude futures fell $2.59 to $62.01 in light trading.

Posted by Tom at 12:54 PM | Comments (0) |

Does Joe Pendry use the Run 'N Shoot?

Looks as if Chronicle NFL sportswriter John McClain better avoid political analysis and stick to football.

In the introduction to a column noting that new Texans offensive coordinator Joe Pendry is much more conservative in his offensive philosophy than the just-fired Chris Palmer, McClain makes the following analogy:

"Texans offensive coordinator Joe Pendry has a reputation for being so conservative he makes George W. Bush look like Bill Clinton."

Posted by Tom at 7:05 AM | Comments (1) |

September 24, 2005

Thinking about Houston's evacuation plan

A couple of days ago it was gridlock as an estimated 2.7 million Houstonians evacuated out of fear of Hurricane Rita. Today, it appears that at least a portion of that gridlock is developing coming in the opposite direction as many residents attempt to return to their homes despite a quickly-developed government plan to stagger the return of the evacuees.

During all of this, I have been giving some thought about Houston's evacuation plan, as reflected by this earlier post. In 1983, Hurricane Alicia -- a minimal category 3 storm -- made a direct on Houston and Galveston. There was no evacuation to speak of and, thus, no gasoline shortages. The storm killed 22 people and caused damage costing about $4 billion in 2005 dollars. On the other hand, Hurricane Rita -- a stronger category 3 storm than Alicia that did not make a direct hit on Houston and Galveston -- has already caused more deaths (24 in the Dallas bus crash alone) than Alicia and resulted in a regional gasoline shortage, while the direct costs of the storm will likely be much smaller than Alicia's.

My purpose in pointing this out is not to criticize the governmental officials' execution of the Houston evacuation plan, which has been thoughtful and generally good. My thoughts are more with regard to the plan itself, which during implementation encouraged all Houston residents -- even those in non-mandatory evacuation areas -- to evacuate. The result was that, despite the fact that Houston has the most highway lane-miles per capita of America's large metro areas, dangerous gridlock and accidental deaths occurred, and the area experienced severe gasoline shortages as a result of the huge spike in demand. Moreover, the gridlock precluded suppliers from being able to deliver new supplies of gasoline and other goods, and despite the good faith efforts of the governmental officials, similar gridlock is occurring as residents return.

This is not to suggest that a hurricane evacuation plan is unnecessary for the Houston area. Clearly, the people in the areas of the metropolitan area that would be flooded by a strong storm surge need to get out. Similarly, arrangements need to be made for the poor and infirm, and for those folks who do not live in sufficiently solid structures to withstand a strong hurricane. However, if Alicia and Hurricane Carla in 1961 taught us anything, then it's that most Houstonians survived the storms just fine by battening down the hatches and remaining in their homes. Moreover, the recovery from such a storm is facilitated in many ways by having property owners tending to their property immediately after the storm rather than attempting to find the back way home from afar.

Just some thoughts to ponder as Houston attempts to return to normal after experiencing one of the largest evacuations in American history. And in the meantime, enjoy Ken Hoffman's alternately hilarious and insightful column about Houston's Rita experience.

Update: The Chronicle's Dan Feldstein and Matt Stiles weigh in on many of the same issues discussed above in this post-Rita article. And the Chronicle's Eric Berger -- who has provided both exhaustive and exhausting (he had to evacuate his family from Clear Lake) coverage of both major hurricanes over the past month -- notes the following in his Monday post on Rita:

Why were people so far away from the coast leaving town? In College Station, my wife ran into a man who had evacuated from Conroe.

Posted by Tom at 3:29 PM | Comments (11) |

Houstonian wins USGA Senior Amateur Championship

In the category of better things to do than waiting around Houston for a hurricane to arrive, Houstonian Mike Rice -- who I believe plays out of Champions Golf Club -- won the the 2005 USGA Senior Amateur Championship on Thursday at the Farm Golf Club in Rocky Face, Ga. Mr. Rice, who is 65, is the oldest winner of the event in 18 years. Here is the transcript of the post-victory interview with Mr. Rice. Hat tip to Bogey McDuff over at Golf Texas for the links to Mr. Rice's victory.

Posted by Tom at 2:02 PM | Comments (0) |

Pay-to-stay evacuation plan?

The always insightful Tyler Cowen over at Marginal Revolution is already thinking about how to improve Houston's evacuation plan:

"Pay people who stay behind. By the day, of course. And only if they own cars."

Tyler's plan makes a lot of sense, particularly for folks who live in sturdy structures in non-flood prone areas. The evacuation of Houston ended up being arduous because an unanticipated large number of people evacuated who did not live in the mandatory evacuation areas. Most of those folks would have been better off battening down the hatches and staying put, but it's hard to criticize folks -- particularly those who do not have a safe haven to ride out such a storm or who are worried about infants -- for wanting to get the hell out. The number of non-mandatory evacuees clearly surprised governmental officials and that resulted in a the delay in getting all main freeway lanes going in the same direction to accomodate the evacuees.

Posted by Tom at 10:22 AM | Comments (2) |

Entergy's New Orleans unit files chapter 11

Following up on this post from earlier this week, Entergy Corporation's New Orleans subsidiary filed a chapter 11 case on Friday in New Orleans (that filing location will certainly cut down on the number of lawyers attending the first round of hearings). Neither the Entergy parent company nor any of its other subsidiaries were included in the bankruptcy filing, which is important because about 250,000 of Entergy's Gulf Coast unit's 1.3 million Texas customers are currently without power as a result of Hurricane Rita. The difference between those two units is that those 250,000 customers without power are still Entergy customers. In stark contrast, Entergy's New Orleans unit has lost a staggering 130,000 customers as a result of Hurricane Katrina, and its unclear how many of those customers will even return to the New Orleans region.

The filing occurred after Entergy concluded that the estimated $750 million to $1.3 billion cost of rebuilding the unit's electric system from Hurricane Katrina-related damage far exceeds what the utility's customers can afford to pay. Immediately upon filing, Entergy's parent corporation requested bankruptcy court authority to advance the New Orleans unit $150 million to head off an emergency liquidity crisis and to provide funds to continue the rebuilding effort. Even that emergency financing was dependent on the parent company obtaining emergency concessions from its lenders to avoid a cross-default on its $2 billion emergency line of credit. Although the New Orleans unit's reorganization plan is in the infancy stages, Entergy is attempting to arrange a plan that is based on insurance proceeds, federal support and a limited rate increase to cover rebuilding costs.

Posted by Tom at 9:29 AM | Comments (0) |

Hurricane Rita update from The Woodlands

As predicted during the morning yesterday, the Houston metropolitan area was spared a direct hit from Hurricane Rita, which came onshore at about 2:30 a.m. this morning at Sabine Pass near the Texas-Louisiana border.

In The Woodlands, which is on the north side of the Houston metro area (pdf region map), the strongest winds -- which were probably 40 - 50 mph steadily with gusts of 75 mph -- occurred between 3:00 a.m. and 6:00 a.m., and have decreased steadily since then. Rain has not been particularly heavy, and my home has had power throughout the storm, although there are wide areas of Houston and the north end that have lost power. Interstate 45 to the east of The Woodlands appears to be a rough demarcation line on the north end where the wind and rain have been worse on the east side of that line. The area between Huntsville and Livingston to the north has been getting hammered hard over the past couple of hours, and the East Texas area around Jasper (just north of Beaumont) is really bearing the brunt of the storm at this point.

Conditions will gradually improve over the next several hours and, by noon or so, we will be able to venture out safely and assess the damage. My sense is that the primary damage in this area will be relatively light wind damage caused by fallen tree limbs, roof damage, broken windows and the like. Frankly, I'm looking forward to venturing out into the weather today because one of the few fringe benefits of these storms is that they cool down the atmosphere greatly, which is much appreciated in these parts because we have been experiencing an excrutiatingly hot late summer -- the high temperature was 95 degrees yesterday.

Finally, I want to pass along my heartfelt thanks for the dozens of phone calls, emails, blog comments, blog posts and the like over the past several days expressing concern and conveying goodwill and prayers for my family and me. The outpouring of concern has been greatly appreciated by my family and me, and we are humbled by the gracious expressions of support. Thank you all very, very much.

Posted by Tom at 8:08 AM | Comments (1) |

September 23, 2005

Emergency shelters in The Woodlands need bedding

Three emergency shelters have been established in The Woodlands to care for evacuees who got caught up in the bottleneck on I-45 leading out of Houston. The shelters are at The Woodlands High School at 6101 Research Forest Drive in The Woodlands 77381-4902, The Woodlands College Park High School at 3701 College Park Dr. in The Woodlands 77384, and The Woodlands McCullough Junior High School at 3800 South Panther Creek in The Woodlands 77381-2799. The Reverend Howard Huhn, the Minister of Outreach at The Woodlands United Methodist Church has sent out this email requesting the following:

Dear Friends,

Because of the traffic associated with Hurricane Rita, our local high schools (McCullough, TWHS, College Park) have opened as shelters. They are in need of bedding. If you have bedding available, please drop it off directly at the schools.

Thank you for being Christ to others.

Howard Huhn
Minister of Outreach
The Woodlands United Methodist Church

Posted by Tom at 1:57 PM | Comments (0) |

A hopeful sign for Houston and Galveston

Jeff Master's latest update of just a few minutes ago indicates that experts are increasingly forming a consensus that Houston and Galveston will avoid a direct hit from Hurricane Rita:

The latest computer models are tightly clustered around a landfall point just west of the Texas/Louisiana border. Confidence is high in this forecast. Houston and Galveston should escape major wind and storm surge damage, and only experience maximum sustained winds of 60 mph with gusts to 85 mph. It is still too early to tell what will happen after landfall, as the models all take Rita different ways. A major rainwater flooding problem will ensue after Rita's landfall, with 10 - 30 inches of rain falling over a large area of Texas and Louisiana.

For the first time since Hurricane Rita entered the Gulf earlier in the week, the cone of uncertainty that shows the range where the hurricane force winds will hit does not include a substantial portion of the Houston area, essentially that part west of I-45.

Posted by Tom at 10:01 AM | Comments (0) |

Here comes Rita

Houston awakens this morning to the news that the two most likely locations for landfall are Port Arthur and Galveston. The cone of uncertainty extends from southwestern Louisiana on the east to the entire Houston metro area on the west. The National Hurricane Center is currently predicting landfall to occur in Jefferson County near Port Arthur, while local experts are predicting landfall slightly west in Chambers County nearer Galveston Bay (county map here). As Rita continues to move slowly with its eye about 260 miles southeast of Galveston, a consensus has developed that the storm will move into northeast Texas after landfall and then stall on Sunday and Monday, potentially causing huge amounts of rainfall of the type that flooded the Houston area during Tropical Storm Allison in 2001. Landfall is expected at this point sometime in the early morning hours of Saturday, probably between 5 a.m. to 8 a.m., although heavy rainfall and strong winds throughout the Houston area will be experienced well before then.

Houston, get ready to rumble.

Posted by Tom at 7:30 AM | Comments (2) |

"Houston to Coach Briles, are you with us?"

For the sake of the University of Houston football program, I am hoping that head football coach Art Briles had his tongue placed squarely in his cheek during his weekly radio show Wednesday described by Chronicle sportswriter Richard Justice:

"OK, there's no requirement that your local college football coach has to read the New York Times Book Review.

But shouldn't he know something.

UH's Art Briles went on the radio Wednesday and just about made a fool out of himself.

When he was asked if this week's game with Southern Miss would be cancelled, he said he hadn't heard anything about it. He also said he hadn't heard anything about a hurricane.

If I'm the president or athletics director at UH, I'm wondering if this guy might have a little too much tunnel vision."

Posted by Tom at 6:12 AM | Comments (1) |

September 22, 2005

Adam Everett and Eric Bruntlett

As the Stros continue their improbable push to a second straight Wild Card playoff berth, two of the team members who are most popular among the Stros' players -- shortstop Adam Everett and utility player Eric Bruntlett -- are the subjects of the seventh segment in our series on the Stros' key players. Previous posts are here, here, here, here, here, and here.

Everett came over to Houston from the Red Sox organization in the 1999 Carl Everett trade, but he lost out to Stros farmhand Julio Lugo in the minor league competition to replace the eminently forgettable Tim Bogar as the Stros' shortstop after the disappointing 2000 season. However, Lugo had a highly-publicized spat with his wife in 2003 and was promptly exiled to Tampa Bay, so Everett was handed the job as a 26 year old rookie.

He showed promise during the 2003 season by exhibiting superior fielding skills while generating about a position average hitting line (-13 RCAA/.320 OBA/.380 SLG/.700 OPS). Then, while showing improvement at the plate during the first part of the 2004 season, Everett's left wrist was broken in a beaning and he was not able to come back in time to play any meaningful role in that club's historic run to the playoffs. Thus, the 2005 season is quite important for Everett, who is no longer a young player at 28 and still has not established himself as a top level National League shortstop.

Frankly, Everett's season has been disappointing. He still is excellent defensively, but his hitting has regressed to the point that a genuine question exists whether he can be anything more than a complementary defensive player on a good hitting team, which the Stros are not. Everett's hitting problem is twofold -- (i) he does not take enough walks (only 24 in about 550 plate appearances), so his on-base average is deficient, and (ii) he has a bad habit of attempting to pull every pitch, which results in a high number of weak ground balls on outside pitches that he ought to be taking to center and right field.

Thus, Everett is not yet a part of the Berkman-Oswalt-Ensberg-Lidge nucleus that will likely keep the Stros in playoff contention over the next several seasons. Inasmuch as he is an above-average defensive player and is at least close to league position average as a hitter, Everett could still become a productive player for the Stros if he can continue to bump his power numbers (11 HR's so far this season) and learn to generate more walks. However, he will be 29 next season, so he needs to improve those skills quickly or he will fall into the category of players who cannot be taught new tricks.

Bruntlett, on the other hand, has had a remarkable season, although perhaps because the expectations for him were much lower than Everett. For the first part of the season, Bruntlett was the player named most likely to be sent to the minors whenever a player was ready to come off of the disabled list. However, the 27 year old career infield utilityman expanded his defensive skills to play center and left field, and has done it very well. In the meantime, he has hit better than expected, has had two game winning hits, and hits above-average for his usual position, which is shortstop. It is doubtful that Bruntlett has the ability to sustain that level of hitting if he were used as a regular player, but he has proven this season that he is a valuable (and, perhaps most importantly, inexpensive) utility player. Bruntlett is one of the real nice stories for the Stros during this surprising 2005 season.

Everett and Bruntlett's statistics are here.

Posted by Tom at 5:32 PM | Comments (1) |

Everett and Bruntlett statistics

Adam Everett
YEAR	AGE	RCAA	OBA	SLG	OPS	AVG	HR	RBI	SB	G
2003	26	-13	.320	.380	.700	.256	8	51	8	128
2004	37	-11	.317	.385	.703	.273	8	31	13	104
2005	28	-16	.296	.379	.675	.254	11	54	20	141
CAR		-48	.308	.370	.679	.255	27	140	45	422
LG AVG		0	.340	.431	.771	.269	45	186	23
POS AVG		-38	.317	.387	.704	.265	25	143	33

Eric Bruntlett
YEAR	AGE	RCAA	OBA	SLG	OPS	AVG	HR	RBI	SB	G
2003	25	-4	.255	.370	.625	.259	1	4	0	31
2004	26	2	.328	.519	.847	.250	4	8	4	45
2005	27	-2	.308	.454	.762	.237	4	14	7	85
CAR		-4	.300	.448	.749	.246	9	26	11	161
LG AVG		0	.340	.431	.771	.269	7	28	3
POS AVG		-4	.329	.397	.726	.268	4	22	5

Posted by Tom at 5:30 PM | Comments (0) |

A cautionary observation

After the jolting early morning news that Hurricane Rita was heading directly toward Galveston Bay, the track models have been trending further eastward for most of the day. The current most likely projection is that the storm will make landfall east of Galveston Bay closer to Port Arthur and Beaumont and, if that happens, most of the Houston metro area would at least be spared a direct hit by the most damaging winds around the storm's eyewall.

However, the key words here are "most likely," which means that there is a very small percentage difference between the storm making landfall at one spot over another. Stated another way, the chance that the storm could come onshore directly on Galveston Bay is still very likely. The storm is reacting to the movement of three weather systems to its north, and it's simply impossible at this point to determine with any reasonable degree of certainty where the storm will make landfall between Freeport, Tx to Lafayette, La. My sense is that it will not be until early Friday morning before the experts will really have a good handle on how the storm is finally going to react to the weather systems to its north and thus, where landfall will occur. Moreover, even that very good prediction can be as much as 30-50 miles off if the storm wobbles even slightly while coming onshore. Remember, Katrina wobbled east at almost the last minute and spared New Orleans a direct hit.

Thus, the bottom line is to remain vigilant in following this storm. It looks like the storm will be at least a strong category 3 when the it somes onshore, and a storm of that magnitude -- even if it comes onshore well east of Galveston Bay -- will cause very dangerous wind and rainfall in the entire Houston metro area.

Posted by Tom at 2:48 PM | Comments (8) |

Thank goodness for the Onion

Hand it to the Onion to provide some levity during Houston's preparations for Hurricane Rita:

WASHINGTON, DC—A bill introduced by Sen. George Allen (R-VA) as "just a goof" several weeks ago was signed into law by President Bush Tuesday.

"I was just trying to crack up Frist and some of the other guys," Allen said. "Everyone's been on edge lately, what with the Katrina situation, and I thought we could use a good laugh."

Added Allen: "Looks like the joke's on me. And, I suppose, the American citizens."

S. 1718, also known as the Preservation Of Public Lands Of America Act, authorized a shift of $138 billion from the federal Medicare fund to a massive landscaping effort that, over the next five years, will transform Yellowstone National Park into a luxury private golf estate.

"I thought it was pretty damn funny when I read over the draft of the thing," said Allen, who said he struggled to keep a straight face when he introduced the law. "Especially the part about how it would create over 10,000 caddy and drink-girl jobs. But I guess it went over people's heads."

The bill passed with a vote of 63-37.

Read on.

Posted by Tom at 10:29 AM | Comments (0) |

Economic waves of Rita

With the eastern shift of the projected path of Hurricane Rita directly into the part of the Houston metro area that contains a huge number of some of the nation's largest oil refineries and petrochemical facilities, Rita's economic ripples have now turned into waves with the distinct possibility that they could turn into an economic tsunami.

It now appears almost certain that Rita will substantially disrupt operations at a significant number of the oil refineries that transform crude oil into gasoline, diesel and other products. The only question is how long those facilities will be down and how much gasoline prices will increase as a result of the shutdown. At least eight refineries in the Houston area will shut down soon as they began scaling back operations yesterday. Inasmuch as four refineries in Louisiana and Mississippi have been closed as a result of damage from Hurricane Katrina last month, almost 20% of U.S. refining capacity will shutdown with the closing of the Houston area facilities, which will only reduce already tight inventories of gasoline that have pushed prices to record levels. To make matters worse, the new projected path of the hurricane would also cause probable extensive damage to offshore oil and natural gas platforms and pipelines that were west of the ones that were damaged in Katrina's path. I think it's safe to say now that the U.S. energy industry has never had to deal with anything on the magnitude of the 2005 hurricane season.

To put this in perspective, the main worries that energy markets are dealing with are the supply of gasoline for the next few days and the amount of natural gas that will be available for the winter months when that fuel is used to heat homes across the entire United States. About 25% of U.S. oil and natural gas production comes from the Gulf of Mexico region and the entire Gulf Coast region contains a third of U.S. refining capacity. So, higher gasoline prices are a certainty and winter heating bills will also increase substantially. According to the U.S. Minerals Management Service, almost three days of natural gas production have already been lost during this hurricane season and that amount is clearly increasing because about half of the Gulf natural gas production remains shut-in. This is an even bigger problem than a reduction in oil production because the nation's capability to import natural gas is much more limited than oil.

Reflecting these concerns, the near-month futures price of natural gas was up 1% to $12.59 per million British thermal units yesterday in trading on the Nymex, which means that the price is up over 54% since the beginning of August. November light, sweet crude futures settled up 60 cents on the New York Mercantile Exchange at $66.80 a barrel after hitting a high of $68.27. October Nymex gasoline futures settled up 7.65 cents at over $2 per gallon. However, prices rose sharply in overnight electronic trading after the Wednesday Nymex session ended with crude futures up 65 cents at $67.45 a barrel and gasoline up 4.19 cents at $2.095 per gallon.

Finally, in addition to the impact on the Houston area refineries, Hurricane Rita also poses a major threat for the chemical and petrochemical plants that exist along side the refineries in the Houston area and along the Texas coast. More than 160 plants from Port Arthur to Freeport are in the potential path of the hurricane. That region generates 50% of U.S. chemical-production capacity, and most of those chemical plants were in the process of shutting down yesterday in preparation for the hurricane.

Accordingly, less than a month after Houston showed just how important it is to our nation when it opened its arms to tens of thousands of evacuees from New Orleans and the central Gulf Coast region, Hurricane Rita is about ready to show the nation just how important Houston is to the nation's economic health. It could be one very tough lesson.

Update: James Hamilton provides his usual measured analysis of the probable economic impact of Rita.

Posted by Tom at 5:07 AM | Comments (3) |

Houston wakes to foreboding news

As you peruse the current projected path of Rita almost directly over Galveston Bay, contemplate Jeff Masters' latest analysis of the situation:

The latest runs of two key computer models, the GFS and GFDL, now indicate that the trough of low pressure that was expected to pick up Rita and pull her rapidly northward through Texas will not be strong enough to do so. Instead, these models forecast that Rita will make landfall near Galveston, penetrate inland between 50 and 200 miles, then slowly drift southwestward for nearly two days, as a high pressure ridge will build in to her north. Finally, a second trough is forecast to lift Rita out of Texas on Tuesday. If this scenario develops, not only will the coast receive catastrophic damage from the storm surge, but interior Texas, including the Dallas/Fort Worth area, might see a deluge of 15 - 30 inches of rain. A huge portion of Texas would be a disaster area.

This scenario is similar to that of Tropical Storm Allison in 2001 that caused catastrophic flooding throughout the Houston metropolitan area. Moreover, with Allison, Houston did not have to deal with the catastrophic wind damage that is almost certain to result from Rita. Although the new projected path of Rita is not good news for Houston, the prediction that the storm might slow down at landfall and stall over Texas and Louisiana is even worse.

Posted by Tom at 4:45 AM | Comments (0) |

September 21, 2005

Buzzard's luck

In the midst of pre-hurricane gasoline and bottled water shortages -- and in anticipation of probable power outages resulting from Hurricane Rita -- this report is not giving me warm and fuzzy feelings:

Facing huge costs for rebuilding its Hurricane Katrina-devastated systems along the Gulf Coast, utility giant Entergy said Tuesday that it will consider filing for bankruptcy protection for its New Orleans unit.

Entergy, whose Entergy New Orleans unit has lost up to an estimated 130,000 customers because of the hurricane, estimates the unit's storm-related costs at $325 million to $475 million.

The company put its total estimated costs for repairing and replacing electric and gas facilities damaged by the Aug. 29 storm at $750 million to $1.1 billion.

Entergy is the utility company for a good part of the northern part of the Houston metro area, including The Woodlands.

Posted by Tom at 9:07 AM | Comments (0) |

More on the sad state of the airline industry

The Wall Street Journal's ($) Holman Jenkins addresses the sad state of the airline industry in his Business World column today, and hammers home a point that this previous post made about the ownership stake in the reorganized United Airlines that the debtor-airline is proposing to foist on the federal government under United's pending reorganization plan:

"Let's not delude ourselves: Through the bankruptcy and pension insurance systems, Washington is already engaged in a bailout -- an incoherent and self-defeating one."

Read the entire piece, and feel free to peruse this long line of posts over the past couple of years on the sad state of the airline industry.

After the economic shakeout of the early and mid-1980's -- which included the demise of the savings and loan industry -- the federal government ended up owning large inventories of foreclosed real estate and related assets in the wake of failed lending institutions. A number of entreprenuers bought those assets from the government for pennies on the dollar and deployed the assets in properly capitalized businesses. It's beginning to look as if a similar market in government-owned airline securities is developing, and it will be interesting to watch if a government sale of those securities at rock-bottom prices will prompt the type of true reorganization from a capitalization standpoint that the American airline industry desperately needs.

Posted by Tom at 6:58 AM | Comments (0) |

Economic ripples of Rita

Crude-oil prices surged on Monday as it became clear that Tropical Storm Rita would threaten the Gulf Coast, then prices fell on Tuesday morning when the National Hurricane Center forecast a more southerly path for Rita that might spare the Houston area, and then yesterday afternoon and overnight, prices rose again as the storm evolved into a major hurricane.

Such are the vagaries of predicting hurricane tracks and commodity markets.

Oil prices settled Tuesday afternoon more than $1 a barrel lower than Monday's closing price as early Tuesday projections had Rita coming in closer to Freeport so that the brunt of the storm would miss the Houston area refineries. Those initial reports triggered a drop of more than $2 a barrel in oil prices, but those prices recovered quickly during the day as Rita strengthened into a major hurricane and evacuations from offshore rigs picked up. At the New York Mercantile Exchange, the October crude contract ended $1.16 lower from its Monday high at $66.23. October gasoline closed at $1.9766 a gallon, down 6.61 cents for the day and October heating oil, up more than 20 cents Monday, ended at $2.0113, down 2.71 cents.

Refineries that are located on the southeast side of the Houston metro area in or near the cities of Pasadena, LaPorte, Texas City, and on east toward Beaumont and Port Arthur generate about 13% of total U.S. refining capacity. Although Hurricane Rita could cause even more damage to the offshore drilling and production infrastructure in the Gulf of Mexico that was already extensively damaged by Hurricane Katrina, the trading markets' even more critical concern at this point is that Rita will hammer Houston's refineries, which would have a huge effect on U.S. refinery capacity.

James Hamilton made a good point awhile back that underscores the importance of Houston's refineries. Older refineries cannot process heavy, sulfur-rich "sour" crude oils (Mexico's Maya grade crude is an example of a common sour crude) and even newer refineries cannot process such sour crudes as efficiently as light, "sweet" crude oil. Consequently, if Houston's modern refinery facilities are shut down by the storm, then demand for light, sweet crude will rise and push its price even higher relative to lower-grade crudes. Inasmuch as about 75% of the crude oil that OPEC countries produced last year was sour, OPEC's promise to increase output has had little effect on trading markets that are more concerned about refinining capacity. Although OPEC has incrementally increased its production of sweet crude since 2000, world production of sweet crude has declined steadily since that time.

Finally, the Chronicle's Tom Fowler has this informative article today about the Houston area's refineries and the potential market impact of damage to those facilities.

Posted by Tom at 5:23 AM | Comments (0) |

Handy hurricane information links

Given that those of us living in the Houston and south Texas area are in for a wild ride over the next few days, I am passing along the hurricane information sites that I am reviewing frequently for up-to-the-minute information and analysis:

Eric Berger's SciGuy. Eric is the Chronicle's science writer who started his blog recently as a part of the weblog initiative that Chronicle tech writer Dwight Silverman promoted at the local newspaper. During Hurricane Katrina, Eric provided an extraordinary source of information and analysis, and he has been doing the same in the early stages of Rita.

StormTrack. A weblog that a couple of young fellows from the northeast started to provide up-to-date analysis of hurricane storm trends. Excellent resource.

Dr. Jeff Masters' WunderBlog. Jeff Masters is the Weather Underground's Director of Meteorology and provides first-rate analysis in his blog.

The Google Map link to the upper Texas Gulf Coast.

This site provides a good overview of hurricane information, including this pithy chart explaining the categories of hurricane strength.

And, of course, the National Hurricane Center site.

As all grizzled veterans of Hurricane Alicia in 1983 know (related Chronicle story is here), this is a serious situation for the Texas Gulf coast and it is time to prepare to batten down the hatches. If you are a relative newcomer to this area and have never been through an intense hurricane before, do not fall into the trap of thinking that the media and others are crying "wolf." This is a deadly serious storm that has the potential to be every bit as devastating to the Texas Gulf coast as Katrina was to the Louisiana-Mississippi-Alabama Gulf coast. As destructive as Alicia was in 1983 (it's eye came in on Galveston's West Beach and tore through the middle of Houston on a track that essentially followed I-45), it was a minimal category 3 storm. In comparison, Rita is shaping up to be a much more powerful storm that is comparable to Hurricane Carla, which was a category 4 (winds of 133-155 mph) storm that caused incredible damage to Houston and the upper Texas Gulf coast on September 11, 1961. Carla had the same minimum barometric pressure as the great 1900 storm that killed over 6,000 people in Galveston.

I hope I have gotten your attention.

Posted by Tom at 4:24 AM | Comments (5) |

September 20, 2005

Coach Price turns up the heat on Sports Illustrated

This prior post related the interesting story of former University of Alabama football coach and current University of Texas at El Paso football coach Mike Price's $20 million libel lawsuit against Time Inc. The lawsuit involves an allegedly false and malicious story that Time's Sports Illustrated magazine ran in May, 2003 involving a very wild night that Coach Price had in Pensacola, Florida while attending a University of Alabama football-related golf tournament. That night of festive activity led to Coach Price's termination as the Alabama football coach before he had ever coached a game for the Crimson Tide.

Well, the Price v. Time case is getting very interesting, as this recent AL.com story relates. An appellate panel of the Eleventh Circuit Court of Appeals has advised Time's attorney in this decision that the attorney-client privilege does not obviate the attorney's parallel obligation as an officer of the trial court to advise the court of perjury that would help identify a confidential source. The attorney stuck between a rock and a hard place is Gary C. Huckaby of Huntsville, Ala., who represents Time in the Price lawsuit.

The crux of the issue before the Eleventh Circuit was the magazine's article in 2003 that Coach Price invited two women he met at a strip club to his hotel room and had sex with them there. Coach Price has denied having sex with any woman in his hotel room that night, so in pursuing his libel suit, he has sought to discover from Time the identity of the anonymous source for the article. Time objected to the discovery on the grounds that the identity of such a sources is confidential.

A U.S. District Judge previously ordered Time to identify the confidential source, and the magazine appealed. During oral argument on that appeal in May, Eleventh Circuit Judges Edward E. Carnes and William H. Pryor Jr. asked Mr. Huckaby from the bench what he would do if, during cross-examination of a witness in a deposition, he heard the person who he knew to be the confidential source deny being the source and, thus, commit perjury. Mr. Huckaby confirmed to the appellate court that he would advise the U.S. District Judge handling the case of any such perjured testimony.

As a result, the panel issued this July decision that vacated the District Court's order requiring Time to disclose the identity of its confidential source. However, the panel went on to point out that Coach Price's counsel could discover the source's name anyway by simply deposing the four women who everyone knows were interviewed for the story and then asking each witness whether she was the confidential source. Faced with the prospect of Mr. Huckaby having to divulge perjury committed by its confidential source, Time requested that the panel reconsider its ruling on the grounds that the attorney-client privilege and ethical standards precluded Mr. Huckaby from identifying his client's confidential source -- even if he knew that she was committing perjury -- because Mr. Huckaby had no duty to advise the trial court of the perjury of a witness who was not his client.

The Eleventh Circuit panel did not buy Time's argument:

"[Time] insist[s] that it is the perfect prerogative of an officer of the court to stand silently by as the search for truth is led astray by perjury -- assuming, of course, that the perjury serves his client's interests.

That is an interesting position. Whatever its merit in general circumstances, there may be problems with it in situations involving the search for a confidential source in a libel case, as this case illustrates. Through their counsel defendants have steadfastly refused to divulge their confidential source for the article in question; they have attempted to shield her identity by every legal means; . . . Now they say that if the confidential source lies under oath and obstructs the pathway to the truth that their counsel has urged us to take, he has no duty to remove the obstruction by reporting the lie. We have some problems with that position.

Does anyone else get the sense that Time needs to settle this case quietly?

Posted by Tom at 12:44 PM | Comments (0) |

The Texans' next firing?

This Wall Street Journal ($) article profiles Dr. Fran Pirozzolo, The Woodlands-based sports psychologist who has developed a successful practice by catering to a couple of dozen professional athletes who seek him out for "stress inoculation" and other "mental toughness" techniques that supposedly enhance performance. I have listened to Dr. Pirozzolo several times on local sports-talk radio shows and, for the life of me, cannot understand how he is able to persuade professional athletes to pay him money for the psycho-babble that he exudes on those shows. However, as the article notes, Dr. Pizzorolo is also the "staff psychologist" of the Houston Texans, who are not exactly the most well-adjusted and emotionally stable group at this time. If offensive coordinator Chris Palmer lost his job after these two performances (here and here), then how on earth has Dr. Fran not also been canned?

Posted by Tom at 8:05 AM | Comments (2) |

Oil and gas markets react to Rita

Whoa, Nellie! Oil prices surged yesterday in anticipation of Hurricane Rita plowing through the Gulf of Mexico as OPEC ministers meeting in Vienna conceded they have no real means to cool red-hot petroleum markets that have become roiled by successive hurricanes in the extensive Gulf of Mexico production region.

The price of U.S. benchmark crude-oil futures for October delivery shot up $4.39 a barrel on the New York Mercantile Exchange and settled at $67.39. That was the highest one-day rise in nominal terms since Nymex began trading oil futures in 1983. Moreover, the storm's approach is slowing down efforts to fix Gulf production infrastructure that was damaged by Hurricane Katrina. The U.S. Mineral Management Service reported yesterday that 44% of the daily output of oil and natural gas remained off-line from the earlier storm.

Folks, hang on to your hat because it's going to be one wild ride this week in the oil and gas markets.

Posted by Tom at 3:38 AM | Comments (3) |

September 19, 2005

Kozlowski and Swartz sentenced

Former Tyco International executives L. Dennis Kozlowski and Mark Swartz were led away from a New York City state courthouse in handcuffs today after New York state Justice Michael Obus sentenced them to serve 8 1/3 to 25 years in prison and pay a total of about $240 million in restitution and fines for being convicted of corporate fraud and conspiracy for looting Tyco of more than $150 million. Prior posts on the conviction of Messrs. Kozlowski and Swartz are here and here.

Under New York law, defendants generally are eligible for parole based upon their minimum sentence, but can earn one-sixth off that time for good behavior and other good deeds while in prison. Accordingly, Messrs. Kozlowski and Swartz could serve as little as about 7 years so long as they are good boys in prison. However, it looks like the men will serve hard time because the New York State Department of Correctional Services generally assigns prisoners to maximum security prisons who have more than six years until they are eligible for parole. Although the Department has leeway to modify that policy according to the circumstances of individual cases, don't bet on that sort of discretion in cases involving former corporate executives -- just ask Jamie Olis.

Update: Ellen Podgor has typically insightful comments on the Kozlowski and Swartz sentencings over at the White Collar Crime Prof Blog. In addition, Professor Bainbridge provides a good overview of the policy considerations emanating from draconian sentences of business executives, and makes a particularly good point that such sentences do little to deter the Kozlowskis of the world, but could very well deter the type of creative risk taking that generates beneficial economic activity.

Posted by Tom at 3:50 PM | Comments (0) |

Texan fans in full revolt

The Texans firing of offensive coordinator Chris Palmer this morning did little to quell the anger of Texan fans over yesterday's debacle, one of whom emailed me as follows:

"The biggest joke of all is leaving the roof open. On Friday, I got an e-mail telling me that the roof would be open and that I should stay hydrated during the game. I couldn't believe they were sending out a heat related medical advisory on a stadium that has air conditioning. During the first year of the new stadium, management said it was going to keep the roof open in order to have an advantage over the teams that didn't practice in the Texas heat. So, yesterday, the Texans -- whose bench is on the sunny side of the field -- sat there and baked. The Steelers had air-conditioned benches (Texans not) and sat in the shade. Moreover, the Texans lost whatever home field advantage we might have had because half of the seats were emptied by people seeking refuge from the sun. What a bunch of Braniacs."

Key hint to the Texans' front office -- the only thing worse than an angry fan is an angry fan who is also hot and sweaty after boiling in the sun for three hours.

Looks like it's going to be a long season, folks.

Posted by Tom at 1:28 PM | Comments (1) |

We don't really need this

Tropical Storm Rita is preparing to enter the Gulf of Mexico, and current predictions have it headed toward the Texas Gulf Coast by the end of the week. This is not good news, particularly for the oil and gas industry's Gulf operations, which have stablized at reduced production levels in the wake of Hurricane Katrina, but are producing at far below usual levels. Here is a download of a handy map of oil and gas interests in the Gulf of Mexico.

With gasoline inventories still low and a substantial portion of Gulf of Mexico oil and gas production remaining shut-in, another hurricane in the Gulf is not what the doctor ordered for the economy. This EIA Daily Report from this past Friday reflects just how precarious oil and gas production is in the Gulf at the present time. If Rita strengthens as expected over the warm waters of the Gulf, then we could experience a real double whammy of damage to Gulf oil and gas production, not to speak to the usual damage to the Texas Gulf Coast that results from such a storm. Hat tip to Calculated Risk for the links to the map and the EIA report.

Update: The latest National Hurricane Center projection has the storm headed straight for the West Beach of Galveston Island. Batten down the hatches!

Posted by Tom at 7:31 AM | Comments (0) |

Close Encounter of the Human Kind

Abraham Verghese, M.D., is the Joaquin Cigarroa Jr. Chair and Marvin Forland Distinguished Professor at the University of Texas Health Sciences Center in San Antonio. After volunteering at the Houston shelters during the relief effort for the Hurricane Katrina evacuees, Dr. Verghese's story of meeting the first hurricane evacuees that were sent to San Antonio resonated with me because it is similar to many conversations that I have had over the past couple of weeks with various evacuees:

Hesitantly, I asked each patient, "Where did you spend the last five days?" I wanted to reconcile the person in front of me with the terrible locales on television. But as the night wore on, I understood that they needed me to ask; to not ask was to not honor their ordeal. Hard men wiped at their eyes and became animated in the telling. The first woman, the one who seemed mute from stress, began a recitation in a courtroom voice, as if preparing for future testimony.

Read the entire unvarnished account. Also, check out this Bob Herbert NY Times piece that relates how the corporate owners of the hard-hit Methodist Hospital in east New Orleans responded to the flood after the hurricane by sending emergency relief supplies to the hospital. Unfortunately, the owners sent the supplies to the airport where FEMA officials confiscated them and sent the supplies elsewhere. Along those same lines, here is the story of a volunteer doctor during the relief effort who a FEMA official ordered to stop treating a patient because he was not registered with FEMA.

Finally, here is a helpful FactCheck.org compilation of stories relating to who knew what when in regard to Hurricane Katrina.

Posted by Tom at 6:27 AM | Comments (0) |

Do you ever feel this way?

Theodore Dalrymple is probably best known for his weekly columns in The Spectator and his essays in the American quarterly City Journal. He is a psychiatrist working in an inner city area in Britain where he is affiliated with a large hospital and a prison. His columns report on the lifestyles and ways of thinking of Britain's growing underclass, and in his book, Life at the Bottom, he warns that this underclass culture is spreading through society.

In his latest City Journal piece, Mr. Dalrymple expresses the frustration that he feels in responding to the various pooh-bah theories that seem to abound these days:

In Australia recently, I shared a public platform with an educationist, who had won awards for social innovation in the field of education for disadvantaged minorities. I was looking forward to what she had to say.

I was soon in a towering rage, however. She uttered some of the most foolish cliches of radical education theory, now about 40 years old—theories that I had fondly thought were now behind us, . . .

Halfway through my own reply, however, I suddenly became bored. Why do I spend so much time arguing against such obvious rubbish, which should be both self-refuting and auto-satirizing the moment someone utters it? Why not just go and read a good book?

The problem is that nonsense can and does go by default. It wins the argument by sheer persistence, by inexhaustible re-iteration, by staying at the meeting when everyone else has gone home, by monomania, by boring people into submission and indifference. And the reward of monomania? Power.

Read the entire piece. Hat tip to Craig Newmark for the link to Mr. Dalrymple's latest.

Posted by Tom at 5:43 AM | Comments (0) |

September 18, 2005

2005 Weekly local football review

Pittsburgh 27 Texans 7

"Houston, we have a problem."

After an absolutely awful performance in Week One of the NFL schedule, the Texans outdid themselves in their home opener by rolling over and playing dead to the Pittsburgh Steelers, 27-7. This is a Texans team that is clearly in turmoil, as most of the players are lifeless and merely going through the motions. In fact, the Texans are beginning to resemble those vintage Oiler disaster-teams of the early 1970's.

QB David Carr is now officially a basket-case who is reverting to survival instincts in the face of even a moderate pass rush from the opposition. Unfortunately for Carr and the Texans, even that approach is not doing much good as Carr was sacked eight times by the Steelers and vented his frustration openly on the field and on the sidelines throughout the game. In fact, a Steelers linebacker Joey Porter was quoted with the following after the game by media reporters:

"[Carr] didn't know what to do. We had him confused. He was arguing with his offensive linemen. It's always a good sign for the defense when the quarterback's yelling at his teammates."

"Sometimes he sacked himself. He was running everywhere, (taking) delay of games, throwing the ball in the dirt, taking sacks, running into guys — he was scrambling for no reason at times."

Texans offensive coordinator Chris Palmer was not exactly ebullient with his QB, either:

"They scramble around and make plays. We scramble around and we don't make plays."

Not a ringing endorsement of the Texans' first draft choice in franchise history.

Meanwhile, the Texans defense remains incapable of generating any meaningful pass rush on the opposition's QB, so the Steelers were able to gain huge chunks of yardage through the air on Sunday. By the way, would someone please introduce new Texan cornerback Phillip Buchanon to Steelers wide receiver Hines Ward?

Frankly, Texans owner Bob McNair has some tough questions to address with the Texans football management. The Texans problem is that they do not have enough good players to compete with teams such as the Steelers, and the responsibility for that deficiency is squarely in the lap of Texans General Manager Charlie Casserly. The Texans have drafted 40 players in four NFL Drafts and, from what I can see, only three players taken in those drafts -- WR Andre Johnson, RB Domanick Davis, and CB Dunta Robinson -- are better than average NFL players. That appears to be an extremely poor drafting record for any NFL team, but particularly for an expansion team such as the Texans. It may not be time to clean house, but it's sure time to start addressing what's wrong with the Texans' plan or the execution of that plan.

Finally, one key hint to the Texans' front office -- give up on this silly notion that the Texans achieve some type of competitive advantage over the opposition by keeping the roof of Reliant Stadium open on a brutally hot afternoon when tempuratures in the sunlight in the stadium easily exceeded 100 degrees.

The Texans will be underdogs against their open week this coming Sunday, while they travel to Cincinnati in two weeks to get pummelled by the red-hot Bengals.

Update: The good news is that the offensive coordinator has been replaced. The bad news is that the new offensive coordinator is the offensive line coach! Can you say "Rearrange the deck chairs on the Titanic?"

Texas Longhorns 51 Rice 10

Does anyone else think that freshman RB Jamaal Charles looks a lot better than Cedric Benson did as a freshman?

The Horns (3-0) toyed with Rice (0-2) before taking the next week off. The Horns travel to Missouri for a warm-up game before taking on the Sooners in Dallas on October 8th. Given OU's troubles, the Horns biggest problem against OU this season may be over-confidence. Rice (0-2) has tough games against Navy in Houston next weekend and then at UAB the following weekend, so an 0-4 start is a distinct possibility for the Owls.

Texas Aggies 66 SMU 8

Despite the loss to Clemson in their first game, my sense is that the Ags (1-1) are going to be a very good team by the end of this season and may be -- along with Tech -- one of the only teams that can give the Horns a run for their money this season. This is a very fast, strong and deep Aggie team that runs and passes the ball equally well. If the defense improves over the course of the season, this bunch could develop into a Top Ten team. The Ags get a JV game against Texas State next week before hosting Baylor the following week in their initial Big 12 game of the season.

UTEP 44 Houston 41 (OT)

The Coogs (1-2) are a frustrating team to watch. They clearly have some talented skill position players who can break an exciting TD run or pass at virtually any time. Meanwhile, however, their games are a mish-mash of penalties, sacks, fumbles, turnovers, missed assignments and poor tackling. I'm not sure that this is entertainment. The Cougars host Southern Miss next Saturday.

Finally, remember to check out Kevin Whited's weekly Big 12 report for analysis of the rest of games involving the rest of the Big 12 Conference.

Posted by Tom at 8:39 PM | Comments (6) |

Stros 2005 Review: Stros enter the stretch run

After almost writing off the Stros' playoff chances a couple of weeks ago, a couple of future Hall of Famers turned in the type of remarkable performances that might just make the difference in pushing the Stros into the National League Wild Card Playoff berth.

On this past Wednesday, after the Stros had lost two straight games to the Marlins and fallen 1.5 games behind the Fish in the race for the Wild Card playoff spot, Roger Clemens took the mound 15 hours after his mother's death and pitched the Stros to a desperately needed 10-2 victory over the Marlins. Then, on Friday, Jeff Bagwell came off the bench in only his third at bat since coming back after four months on the disabled list to hit a two out, pinch hit single in the bottom of the ninth to drive in the winning run in a 2-1 victory over the Brewers that pushed the Stros back into the lead in the Wild Card race. With their series sweep of the Brewers, the Stros have now won five straight games as they prepare for their final 13 regular season games over the last two weeks of the regular season.

The Stros (81-68) are 1.5 games ahead of the Phillies (80-70) and 2.5 games up on the fading Marlins (79-71) in the race for the Wild Card playoff berth. Here are the remaining series for the three Wild Card playoff contenders:

Stros: at Pittsburgh (4); at Chicago (3); at St. Louis (2); Chicago at home (4);

Phillies: at Atlanta (3); at Cincinnati (3); Mets at home (3); at Washington (3);

Marlins: at New York Mets (3); at Atlanta (3); Washington at home (3); Atlanta at home (3).

Based on the foregoing, none of the three contenders appear to have a clear edge in the schedule coming down the home stretch.

Thus, after getting back into the NL Wild Card playoff race with a 47-22 streak after their abysmal 15-30 start, the Stros are now 19-16 over their past 35 games, which is closer to this club's typical performance. My sense is that it will take at least 88 wins to secure the Wild Card playoff spot this season, so the Stros would have to go 7-6 over their final 13 games to achieve that number of wins. If the club can go 9-4 and get to 90 wins, that is almost a sure bet to win the Wild Card berth.

The Stros chronically-deficient hitting has actually improved modestly over the past two weeks even though one of the Stros two best hitters -- Morgan Ensberg -- has been out during that time with a bruised hand. Here are the Stros hitters' individual runs created against average ("RCAA," explained here) through Saturday's games, courtesy of Lee Sinins:

Morgan Ensberg 35
Lance Berkman 29
Craig Biggio 7
Jeff Bagwell 1
Charles Gipson 0
Charlton Jimerson 0
Jason Lane 0
Orlando Palmeiro 0
Todd Self -4
Eric Bruntlett -6
Jose Vizcaino -6
Humberto Quintero -7
Luke Scott -7
Raul Chavez -11
Brad Ausmus -12
Chris Burke -12
Willy Taveras -12
Mike Lamb -15
Adam Everett -18

The Stros have bumped their team RCAA to a -38, which is tied for 12th among the 16 National League teams. Mike Lamb (-15 RCAA/.270 OBA/.401 SLG/.671 OPS) has finally started hitting over the past couple of weeks after having a miserable season, while Jason Lane (0/.301/.491/.792) continues his steady post-All Star break hitting. If Lamb and Lane can continue to supplement Ensberg (35/.385/.565/.950) and Lance Berkman's (29/.408/.512/.919) strong hitting down the stretch, then the Stros' chances of winning the Wild Card berth increase substantially.

Meanwhile, the Stros pitching remains outstanding and is one of the best performances by a staff in club history. Here are the Stros pitchers' individual runs saved against average ("RSAA," explained here) through Saturday's games:

Roger Clemens 53
Andy Pettitte 40
Roy Oswalt 33
Brad Lidge 14
Dan Wheeler 14
Chad Qualls 7
Mike Gallo 3
Travis Driskill 0
Chad Harville -1
Scott Strickland -1
Mike Burns -4
Russ Springer -4
John Franco -5
Brandon Backe -9
Ezequiel Astacio -12
Brandon Duckworth -12
Wandy Rodriguez -19

The Stros pitching staff's aggregate 97 RSAA is second to the Cardinals staff's 136 among the 16 National League teams. The Rocket, Pettitte and Oswalt continue to be first, third, and seventh among National League pitchers in RSAA, which continues to be one of the finest seasons by three starting pitchers on one staff in modern baseball history.

One worrisome aspect about the competition in the stretch run is that the Phillies -- who have been hitting-deficient like the Stros for much of the season -- have really started to mash the ball over the past couple of weeks. Accordingly, the Phils' combined RCAA/RSAA currently is 84, which is quite a bit better than the Stros' 59 and the Marlins' 20, whose pitching outside their top three starters has really cratered. Therefore, if recent trends hold, this is a two team race between the Stros and the Phillies, and the Phils' combination of hot-hitting and strong pitching may be tough to beat.

Posted by Tom at 7:11 PM | Comments (0) |

September 17, 2005

John McMullen, R.I.P.

John McMullen -- who went from savior of the Houston Astros franchise to one of the more reviled owners in Houston professional sports history -- died yesterday at his home in Montclair, New Jersey. McMullen was 87 years old.

McMullen was a successful businessman from the New York area who became interested in investing in professional sports in the mid-1970's when New York Yankee owner George Steinbrenner persuaded him to buy a limited partnership interest in the Yankee franchise. That experience prompted McMullen -- who was known to be a quite witty man -- to observe "[t]here is nothing quite so limited as being a limited partner of George Steinbrenner's."

McMullen's investment in the Yankees led him to buy the Stros franchise from a consortium of asset-based lenders that had taken over control of the franchise after Judge Roy Hofheinz -- the Houston businessman who promoted the construction of the Astrodome and the creation of the Stros franchise financial empire -- suffered a stroke and experienced severe financial problems in the mid-1970's. Inasmuch as the lenders were unwilling owners, they did little to market the club and it showed. By the late 1970's, the Stros were experiencing a sharp decline in attendance and, in fact, 1975 marked the first season in the Astrodome that the club drew less than a million fans. Thus, McMullen's leadership of a group that acquired the Stros in 1979 was widely viewed locally as a positive development, and McMullen's engineering of the signing of local legend Nolan Ryan to Major League Baseball's first million dollar contract in 1980 really re-ignited interest in the Stros and baseball in the Houston area.

Interestingly, despite the caretaker ownership of the Stros by the lenders, the Stros' baseball management continued to emphasize the Stros' traditionally strong farm system and, by the time McMullen's group bought the club, the Stros were a ready to become a contender in the National League. In 1979, the Stros engaged in a feisty pennant race with Cincinnati before finishing 1.5 games behind the Reds in the National League West. With the signing of Ryan and future Hall of Famer Joe Morgan in 1980, the Astros parleyed a dominant pitching staff that included Ryan, J.R. Richard (the season he suffered a tragic stroke), Joe Niekro, Ken Forsch, Vern Ruhle, Joe Sambito and Dave Smith into a division championship and a National League Championship performance that came within three outs of the club's first World Series before the Stros lost to the Phillies, who went on to win the World Series. Although the nucleus of that club returned and lost a division series to the Dodgers in the strike-shortened 1981 season, the Stros began to drift back to mediocrity after that season and, by 1986, Stros fans were becoming restless that the absentee owner McMullen did not not have the requisite interest in developing a winning ballclub.

In that connection, a couple of off-field incidents in the early 1980's started to tilt local sentiment against McMullen. First, McMullen fired popular General Manager Tal Smith -- who had been the architect of the contending Stros club that McMullen inherited in 1979 -- and replaced him with Al Rosen. Three years later, after that Stros club had gone into decline and the local media was beginning to criticize McMullen for his decision to fire Smith, McMullen provided a glimpse of his legendary temper. On April 24, 1983, the Houston Chronicle reported the following:

Houston Astros Chairman of the Board John McMullen, reacting angrily to recent criticism of his team, said Saturday night that Houston's baseball franchise "was the worst in baseball when I bought it in 1979.

"The 25 men on the field today are better than the Astros' 25-man team when I bought the club."

McMullen said he is tired of reading suggestions that Smith was the architect of the Astros' success.

"How can you keep writing that?" McMullen asked. "You'd better start writing the truth. Tal Smith is a despicable human being. It's unfair and wrong for people to keep giving him credit."

Apart from the rather acerbic characterization of Smith, the main problem with McMullen's analysis about the Stros was that it was not true. Accordingly, that little explosion prompted Smith to file a defamation lawsuit against McMullen, which was settled quietly after a U.S. District Court declined to dismiss the lawsuit in this decision. Subsequently, McMullen's limited partners revolted against him, which was quelled only by McMullen cutting a deal with Don Sanders, a local investment banker who was one of the limited partners. However, promptly thereafter, Sanders alleged that McMullen reneged on the deal that he had cut with Sanders to quell the limited partner revolt, so Sanders also sued McMullen. That lawsuit was also settled quietly after an appeals court in this decision reversed a summary judgment in McMullen's favor and sent the case back to the district court for a jury trial.

So, with this backdrop, expectations for the Stros were not particularly high in 1986 when, seemingly out of nowhere, the club put together the third best regular season in franchise history (96-66) and won the National League West going away. With another dominant pitching staff that included Ryan, Smith, Mike Scott, Bob Knepper, Jim DeShaies and Danny Darwin, that club came within a game of the World Series as they lost the National League Championship Series to the Mets after a 16-inning 7-6 Game Six loss that remains one of the greatest playoff baseball games in Major League Baseball history. If he had built on that magic 1986 season, McMullen had a chance to restore his reputation in Houston professional sports circles.

However, even with all the goodwill generated by that 1986 Stros team, McMullen sealed his fate along side Bud Adams as one of the most despised owners in Houston professional sports history with two moves in the succeeding years that almost defy explanation. The first, in 1987, was the decision to fire long-time and tremendously popular Stros play-by-play announcer, Gene Elston. Elston was a real pro as an announcer, and his low-key, analytical, and well-prepared approach resonated with Stros baseball fans. There was simply no reasonable explanation for such a move other than pettiness.

But the next move in 1988 was the straw that broke the camel's back -- McMullen's decision not to re-sign the hugely popular Ryan to a new contract. And not only did he decline to re-sign Ryan, it was the way in which McMullen handled the negotiations with Ryan that angered Houstonians. McMullen directed his General Manager at the time (Bill Wood) to offer Ryan -- who had played nine seasons for the Stros, won 106 games and become the face of the organization -- a 20% salary reduction. In short, McMullen was marking down a local legend.

So, Ryan rebuffed McMullen's insult and signed a contract with the Texas Rangers, where Ryan proceeded to stick it to McMullen in the most delicious manner possible, pitching two more no-hitters (giving him a record 7 for his career), winning his 300th victory, throwing his 5,000th strikeout, and giving the Rangers a much-needed drawing card during his five seasons in Arlington. And just to complete the public relations disaster, Ryan went into the Hall of Fame in 1999 as a Ranger despite his long tenure with the Stros and the fact that he has lived in the Houston area for most of his life. Years later, Ryan noted the absurdity of it all when he commented that "if [McMullen] had just come back and said [he] wanted me to stay another year at my same salary, I probably would have taken it and not thought anything about it." Thankfully, one of the many good things that Drayton McLane has done since acquiring the Stros franchise from McMullen in 1992 was to bring Ryan back into the Stros organization as a consultant and owner of the Stros' AAA Round Rock minor league franchise.

McMullen's reputation was toast in Houston after the Ryan debacle. Despite development of some excellent young talent such as Craig Biggio, Ken Caminiti, and Luis Gonzalez, and the acquisition of such great young players as Jeff Bagwell and Curt Schilling, the Stros under McMullen continued to drift as he simply did not have the heart to market the club properly. Gradually, McMullen's sporting interests turned primarily toward the New Jersey Devils NHL hockey club that he had acquired in the mid-1980's and which won Stanley Cup Championships in 1990 and 1995. Reflecting his lack of interest in the baseball club, McMullen agreed to have the team take a Major League Record month-long road trip in 1992 so that the Republican Party Presidential Convention could use the Astrodome to nominate George H.W. Bush as its Presidential candidate. Thus, at the end of 1992, McMullen sold his interest in the Stros franchise to McLane, triggering the beginning of an era in which the Stros have become one the most successful clubs in Major League Baseball.

What is most interesting about all this is that McMullen really was a rather remarkable fellow. McMullen earned a bachelor of science degree in electrical engineering from the United States Naval Academy in 1940 and then served in the U.S. Navy from 1940 to 1954, resigning with the rank of commander. During his Naval service, he earned a master of science degree in naval architecture and marine engineering from the Massachusetts Institute of Technology and a doctor of mechanical engineering degree from the Swiss Federal Institute of Technology.

Then, after leaving the Navy, McMullen became renowned in the business world for his leadership in ventures including shipping lines, oil tanker operations, naval architecture and marine engineering, he established John J. McMullen Associates in 1958, a firm of naval architects and marine engineers that became one of the most successful naval architectural firms in the nation. In 1967, McMullen organized MPR Associates, a nuclear consulting firm, and in 1968, he was elected chairman and CEO of United States Lines, one of the country's leading shipping companies. In 1974, the Bank of England retained him as president and chief executive officer of Burmah Oil Tankers, a company he reorganized and transformed into an efficient and profitable operation. In short, McMullen was a heavyweight in business circles.

Finally, and perhaps most incongruosly given the acrimony with Ryan, McMullen was actually well-liked by most of the players who played for his clubs. Years ago, Jeff Bagwell told me that he and other young players at the time appreciated the fact that McMullen, after each baseball season, would always organize a trip for the players to come up to New Jersey to play golf at McMullen's course, which just happened to be one of the best in the United States, Pine Valley Golf Club. Similarly, upon retiring after 20 years with the New Jersey Devils hockey team, defenseman Ken Daneyko personally thanked McMullen for his support on and off the ice, particularly McMullen's support during Daneyko's stay in an alcohol rehabilitation program:

"Words can't describe what (McMullen) has meant to me and my wife," Daneyko said at his retirement ceremony, pausing to compose himself. "It goes way beyond a hockey relationship. He's the man who instilled values of loyalty and integrity."

So, even after his tumultuous ownership of the Stros, all Stros fans need to remember that McMullen had the good sense to sell the club to the best owner that the Stros have ever had. So, rest in peace, John McMullen, your life was quite a ride.

Posted by Tom at 8:00 PM | Comments (2) |

September 16, 2005

David Toms hospitalized

Popular Shreveport, Louisiana-based PGA Tour golfer David Toms was hospitalized yesterday on an emergency basis after he was seen clutching his chest and taking a knee due to an escalated heart rate while playing the first round of the 84 Lumber Classic in Pennsylvania. Toms was rushed to a hospital via Life Flight helicopter where he is now reported to be in stable condition.

Update: Toms has been released from the hospital after being diagnosed with Supraventricular Tachycardia, which is a general term for any rapid heart rate originating above the ventricles. It is generally a non-life-threatening condition that can be either treated with medication or cured with minor surgery.

Posted by Tom at 8:13 AM | Comments (0) |

Doesn't the Fifth Circuit know about Gallery Furniture?

The Fifth Circuit Court of Appeals plan to re-open for business this week in Houston ran into a logistics problem -- furniture for the Court's personnel could not be delivered until this weekend. Accordingly, the Court has pushed back its re-opening date to September 21 and the new deadline for filing non-emergency pleadings is October 10. Here is the Court's announcement and related Order.

Meanwhile, this Chronicle article on the Fifth Circuit's operations notes that none of the Court's files in its New Orleans offices appear to have been damaged by the flood.

Posted by Tom at 6:37 AM | Comments (0) |

In the wake of KPMG

Following on this post from last month, this New York Times article reports that, on the heels of KPMG's deferred prosecution agreement with the Justice Department and the subsequent indictment of eight former KPMG partners, federal prosecutors are apparently focusing on other firms involved in the creation and promotion of allegedly illegal tax shelters, including Deutsche Bank and possibly Ernst & Young, the law firm of Sidley, Austin, Brown & Wood, and Texas-based law firms Jenkens & Gilchrist and Scheef & Stone. Here are the previous posts on the KPMG tax shelter saga.

Posted by Tom at 5:50 AM | Comments (0) |

The myopia of the Times

It should be considered progress whenever the New York Times runs an article questioning the draconian prison sentences that are being handed down to business executives in connection with the government's criminalization of business during the post-Enron era. However, one question is prompted by the Times article:

How on earth does one write such an article without noting the sad case of Jamie Olis?

For much more complete analysis of white collar criminal sentences, check out this post over at Doug Berman's blawg, Sentencing Law and Policy.

Posted by Tom at 5:32 AM | Comments (3) |

Spitzer goes after former Marsh execs

Even news relating to natural disasters cannot push the Lord of Regulation out of the public eye for long.

In a widely-anticipated move, Mr. Spitzer's office indicted eight former Marsh Inc. insurance brokers and executives yesterday on criminal-fraud charges in connection with Mr. Spitzer's long-running investigation of alleged bid-rigging in the insurance industry. Earlier posts on Mr. Spitzer's forays against the Marsh employess are here and here.

The indictments allege essentially the same matters as the earlier civil lawsuit that Mr. Spitzer brought against Marsh -- that the brokers cheated some corporate clients by rigging bids for excess casualty insurance contracts in a scheme to steer business to insurers that paid Marsh larger commissions than Marsh would have received from more competitive insurers. Mr. Spitzer alleges that the scheme increased at least 35 Marsh customers' insurance costs by as much as $1 million in some instances. Earlier this year, Marsh & McLennan signed an $850 million settlement (ransom?) with Mr. Spitzer's office under which the company apologized to its customers for its employees' unlawful" and "shameful" behavior. Over the past several months, eight former Marsh employees have pled guilty to criminal charges in the matter.

For his part, Mr. Spitzer -- who, as a part of the investigation into Marsh, arranged for the installation of his former employee and tennis buddy, Michael Cherkasky, as Marsh & McLellan's CEO -- stated that Marsh "should be applauded" for changing its management and business model to avoid conflicts of interest, but added that there may be even more prosecutions of former or current Marsh employees and others in the corrupt insurance industry.

Spitzer is a real piece of work.

Posted by Tom at 5:05 AM | Comments (0) |

A new home

This Washington Post article reports that a survey by The Washington Post, the Henry J. Kaiser Family Foundation and the Harvard School of Public Health has found that less than half of all New Orleans evacuees living in emergency shelters in Houston said they will return to the Crescent City and that about two-thirds of those who plan to relocate are probably going to settle permanently in the Houston area.

The findings in the survey are consistent with my anecdotal experience in talking with evacuees while volunteering over the past couple of weeks at the George R. Brown Convention Center and at my family's church here in The Woodlands. Few of the evacuees who I have spoken with plan to return to New Orleans, primarily because they have lost everything and they do not believe that they will have any employment opportunities for a long time if they were to return. Those who have relatives in larger cities in the region tend to gravitate toward those family members, but few of the evacuees have any desire to move away from the region. I helped cook breakfast for some evacuees this past Tuesday morning, and one nice man put it to me in this way with a wry smile: "If we were to leave [the region], where would I fish?"

Finally, every evacuee with whom I have spoken has expressed heartfelt gratitude for the kindness and hospitality that Houstonians have shown them. One of my sons and I are looking forward to working the morning shift (4 a.m. to 10 a.m.) tomorrow at the Brown Convention Center, and it appears that we will be helping the last group of evacuees at the Brown prepare to move on to smaller shelters or apartments. Houston officials are projecting that the Brown Convention Center shelter may be able to be closed by as soon as the end of this weekend. The Astrodome and Reliant Convention Center shelters at Reliant Park are currently scheduled to be closed by early next week, although the Reliant Arena shelter at Reliant Park will probably continue to be City's center for processing evacuees to smaller shelters and permanent housing for several more weeks.

Finally, the NY Times carried this nice piece about Houston's civic efforts to assist the evacuees from the Gulf Coast.

Update: Just got word that the Brown Convention Center will close as a shelter after dinner next Tuesday, September 20.

Posted by Tom at 4:34 AM | Comments (3) |

September 15, 2005

Markets at work

A funny thing happened in response to the recent run-up in gasoline prices resulting from Hurricane Katrina -- demand for gasoline dropped dramatically.

Clear Thinkers favorite James Hamilton puts it all into perspective.

Posted by Tom at 7:54 AM | Comments (0) |

Tom DeLay said what?

This Washington Times article refers to House Majority Leager Tom DeLay's recent comments regarding the Bush Administration's record on government spending:

House Majority Leader Tom DeLay said yesterday that Republicans have done so well in cutting spending that he declared an "ongoing victory," and said there is simply no fat left to cut in the federal budget.

Mr. DeLay was defending Republicans' choice to borrow money and add to this year's expected $331 billion deficit to pay for Hurricane Katrina relief. Some Republicans have said Congress should make cuts in other areas, but Mr. DeLay said that doesn't seem possible.

On the contrary, the Bush Administration compares poorly with past administrations in terms of cutting non-defense governmental spending, approved outrageous and poorly-administered pork barrel spending, ushered in a huge unfunded increase in the government's future liabilities through the Medicare prescription drug benefit package, and has arguably presided over the biggest and most reckless deterioration of America's finances in history.

In what parallel universe is Mr. DeLay operating?

Hat tip to Arnold Kling for the link to the Washington Times article.

Posted by Tom at 7:21 AM | Comments (2) |

Incredibly bad judgment

Sometimes I am left to scratch my head and ponder whether there is any adult supervision left in Washington, D.C. these days. The latest incident giving me pause is the disclosure that Senate Democrats have designated John W. Dean III as a potential witness today during Judge John Roberts' confirmation hearing before the Senate Judiciary Committee.

Now, most of us older bloggers know all about John Dean, but younger folks might not. Mr. Dean is the convicted felon who somehow crafted his legacy of breaching the attorney-client privilege and testifying to Congress against his client (former President Richard M. Nixon) during the Watergate Scandal in the early 1970's into a job as an "expert" legal commentator for FindLaw.com. An example of his "scholarship" is this article in which he took the dubious position that Senator John Kerry would have a pretty good defamation claim against Swift Boat veteran John O'Neill, who is a longtime and well-regarded Houston attorney.

Recently, Mr. Dean has been writing articles on FindLaw.com opposing the confirmation of Judge Roberts and contending that the White House should release Mr. Roberts' documents from his time in the Solicitor General's office during the 1980's. Unfortunately for Mr. Dean, every Soliciter General in recent memory has taken the position publicly that such documents are covered by the attorney-client privilege and should remain confidential.

So, rather than rely on the advice of previous Solicitor Generals, the Democrats on the Judiciary Committee tap a convicted felon who violated the attorney-client privilege during the Watergate hearings to testify that the privilege should be violated again with regard to Judge Roberts' work on behalf of the Solicitor General.

What on earth are these people thinking?

Posted by Tom at 5:49 AM | Comments (4) |

Delta and Northwest tank

As anticipated here earlier this week, Delta Air Lines commenced its inevitable chapter 11 reorganization case yesterday and was joined by fellow legacy carrier Northwest Airlines. Both chapter 11 cases were filed in New York City, which has become the preferred venue for big reorganization cases (or at least the preferred venue for the debtors' attorneys).

With the filing of these cases, four of the U.S.'s seven largest airlines (by passenger traffic) are wallowing in Chapter 11 and more than half the capacity of the nation's top dozen airlines are now under the jurisdiction of the Bankruptcy Courts. Although the liquidation of one or more of these debtor-carriers would likely improve the overall financial health of the airline industry, it's difficult to put a big airline out of its misery.

The common thread behind all four big airlines currently in bankruptcy are that they are legacy carriers that have been unable to modify the structure of their finances and operations to remain profitable during this era of industry deregulation. The airline industry has faced a brutal business environment over the past five years, including high labor costs, increasing fuel prices and increased competition from low-cost carriers such as Southwest Airlines.

Although an effective way to convert excess debt to equity in a reorganized entity, a chapter 11 case is no guarantee that a reorganized airline will be successful. As noted here, substantial questions already exist whether the proposed reorganization plan in the United Airlines case will allow that airline to be profitable after bankruptcy, and several airlines have already filed chapter 22 cases (that is, chapter 11 twice), including US Airways and Houston-based Continental Airlines. Years ago, Eastern Air Lines and Pan American Airways were both liquidated in chapter 11 with other airlines buying their assets, while TWA was swallowed by American Airlines during TWA's chapter 33 case.

Moreover, there is a developing line of thought -- one that Larry Ribstein has frequently addressed on his blog -- that there has not been enough contraction in the airline industry to make the industry profitable during this era of higher-than-expected fuel prices. Most airlines these days would be profitble if oil were selling at $35 a barrel, but the adjustment in the industry to oil prices almost double that price is delayed by chapter 11, which allows money-losing airlines such as United to continue operating and competing with non-bankrupt airlines that are attempting to restructure outside of bankruptcy. For example, Northwest would have gained market share and benefited greatly had United liquidated or become a much smaller airline, but United did not do so and has been operating in bankruptcy for almost three years now. Similarly, had US Airways bitten the dust rather than go into chapter 11, Delta would have been been able to gain market share and raise some prices on its East Coast routes, which might have allowed the company to parley that increased business into the changes necessary to stave off a bankruptcy case. Consequently, there is a real issue as to whether chapter 11 is really promoting the type of restructuring necessary to transform the airlines into a financially sound industry.

Delta has arranged over $2 billion in debtor-in-possession financing from a consortium of DIP lenders led by General Electric Co.'s commercial finance unit and Morgan Stanley. Interestingly, Northwest believes that it has sufficient liquidity to make a go of it in chapter 11 without DIP financing, although that may simply be a decision to avoid a fight with its current lenders, who have locked up virtually all of Northwest's assets.

With US Airways about ready to emerge from its current chapter 11 case through a reorganization merger with America West, there has been some speculation in the markets that Delta and Northwest may pursue a similar merger while in chapter 11 with the assistance of private equity. The two airlines route networks do not overlap much and Delta's trans-Atlantic flights would complement Northwest's foreign routes. As with the US Airways-American West merger, absent fundamental changes in the way the two airlines operate, such a merger would likely be nothing more than a rearrangement of the deck chairs on the Titanic.

Posted by Tom at 4:28 AM | Comments (3) |

September 14, 2005

A Judge challenges the Enron Task Force's bludgeoning of a plea bargain

A frequent topic on this blog has been the unjust nature of the government's questionable tactic of bludgeoning business executives into plea bargains by playing on the executive's fear of a draconian prison sentence (often an effective life sentence) if the executive has the temerity to assert his or her Constitutional right to a fair trial by jury. Although prosecutors justify such tactics as a reasonable tool in seeking the truth about criminal acts of others, plea bargainers often undermine that goal by testifying falsely in order to obtain the favorable terms of the deal. Moreover, the Enron Task Force's bludgeoning of plea bargains has been particularly egregious because the Task Force is not using the tactic to promote the truth. Rather, as reflected by the strong evidence of witness tampering in all of the Enron-related criminal cases, the Task Force has been intimidating huge numbers of witnesses (114 in the Lay-Skilling-Causey case alone!) who would testify favorably for the defendants in those cases. That tactic has already resulted in the jury in the Nigerian Barge case not hearing the full story in that case, contributing to the imprisonment of four innocent former Merrill Lynch executives.

Although one judge is currently grappling with how to deal with the Enron Task Force's witness tampering tactics, another judge -- U.S. District Judge Lynn Hughes -- recently made clear during a hearing in another Enron-related criminal case that he is highly skeptical of the Enron Task Force's bludgeoning of a plea bargain from a former Enron executive who is likely going to be a key witness in the upcoming trial against former Enron executives Ken Lay, Jeff Skilling and Richard Causey. You may recall from this previous post that Judge Hughes is not relunctant to criticize the government when it abuses its overwhelming power against individual citizens.

The particular Enron-related criminal case in which Judge Hughes weighed in is that of Christopher Calger, a former Enron North America executive, whose plea bargain was the subject of this previous post. As noted in that post, the case against Mr. Calger involved a somewhat convoluted 2000 transaction known as Coyote Springs II in which Enron North America sold some energy assets to a third party and arranged a hedge of the third party's risk that Enron North America would not complete the sale of all of the assets. Although it's not at all clear that there is anything even questionable -- much less criminal -- with that transaction, Mr. Calger elected to enter into a plea bargain with the Enron Task Force rather than risk the financial drain and long prison sentence that could result from defending his innocence at trial.

At any rate, when the Task Force decided to announce Mr. Calger's plea bargain -- which just happened to be on the same day that the jury in the Enron Broadband case began jury deliberations (are you still doubting that the Enron Task Force plays fair?) -- the judge assigned to the criminal case against Mr. Calger was out of town and unavailable to take the plea. Rather than postpone the hearing and lose the opportunity to taint the Enron Broadband jury with publicity about another admission of guilt in connection with an Enron-related case, the Task Force elected to proceed with the hearing on Mr. Calger's plea bargain in front of Judge Hughes, who has not been assigned to any Enron-related criminal cases.

Although mainstream media accounts of the hearing on Mr. Calger's plea bargain reported nothing about what actually occurred during the hearing, the transcript of the hearing (download here) reveals that the Task Force's decision to proceed with the hearing in front of Judge Hughes nearly backfired.

Beginning on page 9 of the 23 page transcript (p. 11 of the pdf), Judge Hughes begins questioning both Mr. Calger and then the Enron Task Force prosecutor regarding the nature of the alleged offense. Very quickly, it becomes clear from the transcript that the Task Force prosecutor neither understood the underlying transaction involved in the indictment of Mr. Calger nor could articulate precisely what crime Mr. Calger had committed. At the end of the questioning, Judge Hughes gave Mr. Calger an opportunity to reject the plea bargain, which he declined to do. As a result, Judge Hughes accepted the plea bargain, although it is clear from the transcript that he was not comfortable in doing so.

So, what really is the bigger problem to American society and the rule of law -- criminal business executives or out-of-control prosecutors? My answer is here and here.

Posted by Tom at 7:50 AM | Comments (1) |

Duke Energy sheds wholesale power and trading assets

In a move that was widely-anticipated in energy circles, Duke Energy Corporation plan to shut most of its money-losing wholesale power and trading businesses and take a third-quarter pretax charge of about $1.3 billion. Duke is shedding most of its wholesale power business as it expands its traditional utility operations through a planned $8.98 billion acquisition of Cinergy Corp.

Duke started paring its wholesale power business after the bankruptcy of Enron Corp. in December 2001 and the ensuing collapse of the wholesale electricity markets and related trading business. Government investigations into trading practices followed, which resulted in criminal indictments that furthered soured Duke on the trading business. In the meantime, buyout firms, hedge funds and investment banks such as Goldman Sachs and Morgan Stanley have become much more active in buying power plants and trading electricity.

Posted by Tom at 5:19 AM | Comments (0) |

Good news from the Port of New Orleans

The Port of New Orleans re-opened on a limited basis yesterday and plans to be at 80% of capacity within three months. Moreover, the nearby Port of South Louisiana and Port Fourchon on the Gulf Coast have also partially restored service, and the Port of Pascagoula, Miss. expects to resume service by early October. Although the focus of analysis on the economic effect of Hurricane Katrina has been on the oil and gas industry, the economic impact on shipping along the Mississippi River and Gulf of Mexico has also been severe, so the reopening of the ports in the New Orleans area is good news.

Posted by Tom at 5:05 AM | Comments (0) |

September 13, 2005

Blogging at the big Houston shelters

Former Houstonian Christine Hurt of the Conglomerate blog passes along a new Houston-based blog by two South Texas College of Law professors -- Tracy McGaugh and Kathy Bergin -- who are making daily treks to Reliant Park and sometimes to the George R. Brown Convention Center to provide insight into the experience of the evacuees at both locations. The new blog is called White Washing the Black Storm: We Are Watching.

Each day, the profs volunteer at the medical aid table and ask what medicine is needed. Then, the profs go to a local drugstore and buy the medicine needed. The blog has a link where you can donate to the cost of the medicine, which the profs have been largely subsidizing.

The blog also provides somewhat unvarnished commentary on the goings on at each shelter, which is an important component of the complete story regarding Houston's extraordinary effort to provide for the evacuees. It's not all peaches and cream out there, folks.

Posted by Tom at 11:26 AM | Comments (0) |

One of the benefits of takeover battles

Financially-strapped Six Flags, Inc. -- the subject of an ongoing takeover battle -- announced yesterday that it would close Houston's AstroWorld theme park at the end of October and that it had engaged Cushman & Wakefield to market the valuable 109-acre site just south of the Reliant Park complex for sale.

The 37 year old theme park is overdue for finally being put to rest. AstroWorld was not originally a Six Flags Park, so it was not as well-planned as most other Six Flags Parks. Moreover, the park was landlocked from expansion and had poor relations with Harris County with regard to parking issues at adjacent Reliant Park. Consequently, Six Flags minimized capital expenditures at the park, which turned it into a decaying mess over the past several years. Thankfully, the value of the land is finally prompting Six Flags to put the underperforming park out of its misery.

Posted by Tom at 8:48 AM | Comments (1) |

Update on Katrina's economic ripples

Petroleum futures fell to pre-Hurricane Katrina levels for the first time since the storm yesterday on news of heavy losses in refined products and market concern that that high gasoline prices have depressed demand for product. Earlier posts on the developing economic effects of Katrina over the past couple of weeks are here, here, here, here, here, here, here, and here.

Benchmark light, sweet crude oil futures for October settled at $63.34 a barrel on the Nymex Exchange, while Nymex gasoline futures for October settled down 8.60 cents at $1.8737 a gallon. Losses in heating oil futures on the Nymex were also substantial as the October contract settled down 8.22 cents at $1.8143 a gallon.

Despite the downward trend in the gasoline futures market, news on the Gulf oil and gas production front remained measured. Although operations at the Louisiana Offshore Oil Port were fully restored yesterday for the first time since the storm, oil production in the Gulf of Mexico showed only marginal improvement during the weekend as about 57.4% of daily output remains offline. Almost 60% of the daily total was offline as of this past Friday.

Posted by Tom at 8:17 AM | Comments (0) |

Westar executives convicted

A federal jury in Kansas City yesterday found former Westar Energy Inc. Chief Executive Officer David Wittig and chief strategy officer Douglas Lake guilty of looting the electric utility of millions of dollars. Previous posts on the hotly-contested case -- which included a previous trial that ended in a hung jury -- are here and here.

The prosecution against the two former Westar executives was similar to the prosecution of former Tyco executives Dennis Kozlowski and Mark Swartz in that the prosecution alleged that Messrs. Wittig and Lake engineered extravagant salaries and benefits for themselves at the expense of Westar shareholders while hiding their actions from the company's board and federal regulators. As in the Tyco trial, Messrs. Wittig and Lake denied the charges and contended that all of their actions were legal, approved by the company's directors and disclosed in the company's regulatory filings. The jury found Messrs. Wittig and Lake guilty of conspiracy, wire fraud, circumventing internal controls and money laundering.

Mr. Wittig became CEO of Westar in 1998 and hired Mr. Lake, a former colleague at Salomon Brothers, to become his chief aide. After some initial success, Mr. Wittig's quick-deal strategy faltered and Westar's stock price fell from $44 to $9 as the company came under pressure from shareholders and regulators. As in the Tyco case, an outside law firm hired by Westar's board eventually uncovered many of the actions of Messrs. Wittig and Lake that led to the indictment against the former executives.

Posted by Tom at 7:41 AM | Comments (0) |

2006 -- The Enron Trial Year

Over four years after Enron's descent into bankruptcy, 2006 is shaping up as the year of the Enron criminal trials.

First, in mid-January, the trial of the Enron Task Force's legacy Enron case -- i.e., the trial that everyone will remember -- cranks up against former Enron chairman Ken Lay, former CEO Jeff Skilling, and former chief accountant, Richard Causey.

Then, in May, the first retrial of defendants in this year's mistrial in the Enron Broadband case will take place against Kevin Howard, former chief financial officer of EBS, and Michael Krautz, former senior accounting director at EBS.

Following that trial, the second retrial of one of the Enron Broadband defendants will proceed in June against Scott Yeager, the former senior vice president of business development. Finally, the final two of the five Broadband defendants -- Joe Hirko, former co-CEO of Enron Broadband Services, and Rex Shelby, former senior vice president of engineering and operations at EBS, will be retried in September. Mary Flood's article on the Enron Broadband retrials is here.

Thus, 2006 is shaping up as quite a season for Enron-related criminal trials. And you thought the NFL season lasted a long time?

Posted by Tom at 3:31 AM | Comments (2) |

September 12, 2005

Andruw Jones for MVP?

I enjoy the writing of Chronicle sportswriter Richard Justice, but he occasionally gets carried away, as with this note on his blog today:

"Andruw Jones will be the National League's Most Valuable Player. The balloting won't be close if voters have been paying attention. He's leading the NL in both home runs and RBIs. He carried the Braves while their young players were establishing themselves. He's the man."

Andruw Jones for National League MVP? Yes, he did hit his 48th and 49th homers yesterday and is having his best season, but Jones (32 RCAA/.360 OBA/.612 SLG/.972 OPS) is not even close to being the best hitter in the National League this season. The best hitters are the Cubs' Derrick Lee (84/.422/.670/1.092) and Albert Pujols (76/.434/.631/1.065), both of whom have created over 40 more runs for their respective teams than Jones has for the Braves. Heck, Andruw Jones is not even clearly the best hitter named Jones on the Braves -- Chipper is hitting 30/.418/.570/.988. There are at least eight other players in the National League -- including the Stros' Morgan Ensberg (34/.384/.564/.948) -- who are having at least as good or better a season hitting the baseball as Andruw Jones.

Inasmuch as Pujols has been the best player in the National League not named Bonds over the past several seasons, he should win the National League MVP this season. Lee would not be a bad choice, either, although my sense is that he is having a career year and Pujols deserves it more because of his previous MVP-quality seasons. However, one thing is clear -- despite all those taters, Andruw Jones is not the National League MVP this season.

Posted by Tom at 1:15 PM | Comments (6) |

Woody Hayes' advice to defense counsel in the Enron cases

Peter Henning over at the White Collar Criminal Prof Blog is skeptical that U.S. District Judge Sim Lake's letter-writing campaign is going to induce any of the recalcitrant witnesses in the criminal case against former Enron executives Ken Lay, Jeff Skilling and Richard Causey to come forward in the face of the prosecution's intimidation tactics and confer with the defendants and their counsel. Professor Henning concludes as follows:

It's a little bit like the old Woody Hayes view of passing: only three things can happen if you meet with the defense lawyers, and two of them can be bad, so why take the risk? I will be surprised if many of the 38 letter recipients agree to meet with the defense team.

Many folks down here in Texas believe that former Texas coach Darrell Royal popularized that pithy quote about passing in football, but I believe that Professor Henning is correct that Coach Royal picked it up from Coach Hayes.

Posted by Tom at 6:58 AM | Comments (1) |

Bush = Carter?

The inimitable Professor Bainbridge is not happy with President Bush for a variety of valid reasons, and recently observed that the President may be becoming the Republican Party's equivalent of what former President Jimmy Carter has been for the Democratic Party.

The Professor's criticism of President Bush has merit. Regardless of what one thinks about the Administration's venture into Iraq, the Bush Administration has overseen a tremendously damaging criminalization of business interests, largely ignored health care finance reform and income tax simplification, increasd farm subsidies, installed tariffs for various products (including steel, lumber, and even shrimp), created a massive new prescription drug benefit, promoted dubious amendments to the U.S. Bankruptcy Code and nationalized airline security by folding it into a huge and ineffectual bureaucracy. That's not exactly a slate of accomplishments that exudes Presidential greatness.

But as bad as Jimmy Carter? No way. Refresh your memory of just how bad Mr. Carter was (and continues to be) in these reviews (here and here) of Steven F. Hayward's book about Mr. Carter, The Real Jimmy Carter. Even as bad as President Bush has been, he cannot limbo under the low bar that Mr. Carter established.

Along these lines, this Opinion Journal piece discusses a recent poll of historians who ranked Mr. Bush's performance as average among Presidents. Mr. Carter ranked as below-average, just a cut above "failure."

Posted by Tom at 5:19 AM | Comments (12) |

Delta is ready to file a chapter 11 case

Following on this report from about a month ago, this Wall Street Journal ($) article reports this morning that Delta Airlines will pull the plug this week and file a chapter 11 reorganization case. Let's hope that this prediction on the timing of the filing of the chapter 11 case is a bit better than this one, and that Delta's stay in chapter 11 is bit shorter and more pleasant than this one.

Delta is certainly a prime candidate for reorganization. The airline has lost almost $10 billion since 2001, has debt of about $20 billion and expensive pension obligations. As of the end of this year, Delta faces $470 million in maturing debt, $550 million in interest payments, $460 million in operating lease payments and $135 million in pension payments. Not many companies have a spare $2 billion in cash laying around to spread around such obligations.

Meanwhile, Houston-based Continental Airlines announced late last week that it expects to save about $300 million in 2005 from employee compensation reductions, but still expects to record a "significant loss" for the year. The company also noted that record high fuel prices continue to offset a continued improvement in revenue trends. Continental had a net loss of about $86 million for the first six months of 2005, but the company continues to maintain decent liquidity levels as it anticipates ending the third quarter with $1.9 billion and $2 billion in unrestricted cash and short-term investments and to end the year with a cash balance of about $1.5 billion.

Interestingly, Continental also announced that Boeing Co. has agreed to provide backstop financing for Continental's purchase of new Boeing aircraft to support its international operations. Such credit enhancements are not typically necessary for companies that are not having trouble tapping the usual asset-based credit markets.

Posted by Tom at 4:37 AM | Comments (0) |

2005 Weekly local football review

Two local quarterbacks had very different tales during the first full week of college and pro football of the 2005 season.

Texas Longhorns 25 Ohio State 22

In a magnificent early-season game between two storied college football programs, Texas' WR Limas Sweed made a tremendous catch for the winning touchdown in the closing minutes on a 24 yard pass from QB Vince Young as the Longhorns held on to beat Ohio State before a record 105,000 crowd in Columbus. Although the gazelle-like Young was the media-picked star of the game, it was the Longhorn defense that actually won the game for the Horns as that plucky unit held the Buckeyes to three field goals after three Longhorn turnovers deep in their own territory gave the Ohio State offense multiple opportunities to build an insurmountable lead. Also, it looks to me as if the Horns have a couple of emerging stars in freshman RB Jamaal Charles and MLB Aaron Harris. About the only negative for the Horns was their kick-off team, which continued the abysmal trend that first appeared in last season's Rose Bowl game against Michigan. The Horns have a couple of warm-up games against Rice at home and Missouri on the road sandwiched around an off-week before the Oklahoma game on October 8th in Dallas.

Buffalo 22 Texans 7

In a game that was not as close as the score indicates, the Texans looked even worse than they did in the final game of last season against Cleveland in losing to the Bills in Buffalo. QB David Carr and the offense were pathetic, as Carr threw three interceptions and fumbled once, and was sacked five times and harrassed on virtually every pass play. The offense could generate only 107 yards, had seven possessions of three plays or less, and did not have a first down until the second quarter when the Bills already led 12-0. The only positive from the game was the play of the Texans' defense, which held the Bills to only one touchdown despite being put in adverse positions the entire game by the Texans' ineffectual offense. It doesn't get any easier for the Texans as they play the Steelers at home and the Bengals in Cincy with their off-week in between over the next three weeks. Frankly, based on their performance in the Bills game and despite my generally positive pre-season analysis, it's a bit difficult to see how the Texans could win more than just a few games this season.

Cowboys 28 San Diego 24

New Cowboys QB Drew Bledsoe three three TD passes as the Cowboys held on to beat the Chargers in San Diego. Former Texans CB Aaron Gleen intercepted a Drew Brees pass in the Cowboys end zone with 24 seconds left to seal the win for the Pokes. By the way, Brees is about the same age as David Carr and has roughly the same experience level as Carr, but Brees is a far superior QB to Carr at this point in their careers.

Houston 31 Sam Houston State 10

The Coogs overpowered a good Division I-AA Sam Houston team while warming up for their first C-USA game against a tough UTEP team in El Paso next Friday night.

UCLA 63 Rice 21

In another game that was not as close as the score indicates, the Owls allowed UCLA to score the first seven times they had the ball, and apparently stood by and watched as the Bruins rolled up 300 yards total offense in the first quarter and over 400 yards by halftime. In the understatement of the year, Rice coach Ken Hatfield observed after the game that "it was a physical mismatch. They're just plain better than us." Rumor has it that Texas will play its junior varsity against the Owls this Saturday in Austin.

The Texas Aggies were off this past weekend and play SMU in College Station on Saturday before taking on Texas State and Baylor at home over the following two weekends before traveling to Boulder to play Colorado. And Kevin Whited is back from vacationing and has cranked back up his weekly Big 12 Conference football review.

Posted by Tom at 4:00 AM | Comments (1) |

September 11, 2005

"Who's laughing now, Mister?"

During the U.S. Open Tennis Tournament, Lexus has been running a clever series of commercials featuring U.S. tennis star Andy Roddick. The series -- called "On the Road with Andy Roddick" -- features five different people talking to Mr. Roddick about various subjects while cruising with him in a convertible Lexus.

Click here to watch each of the five commercials. My favorite: "Catfish"

Posted by Tom at 4:42 PM | Comments (0) |

Will the NY Times blame Enron for the delay in the Hurricane Katrina relief effort?

My sense is that the New York Times editors need a little psychiatric help in letting their "Enron-thing" go.

In this article, the Times reports on a working paper by a couple of East Coast economists who propose the rather unsurprising hypothesis that accounting scandals are one of many factors that tend to have a negative effect on job growth. Thus, the Times translates that working paper into the headline: "The Crime: Slow Job Growth. A Suspect: Enron."

Of course, the Times didn't bother to call the longstanding the expert on Houston's employment market to find out the effect that Enron's demise has had on Houston's employment market (it's not had much long-term effect). Nor does the Times bother to note that governmental regulation through criminalization of business -- particularly the Arthur Andersen case -- has likely had a far larger negative effect on jobs than the accounting scandal at Enron or other companies.

By the way, this is not the first time that the Times editors have used a questionable headline relating to Enron. Is there a medical term for an unhealthy preoccupation with Enron? Enronpsychosis?

Posted by Tom at 2:00 PM | Comments (3) |

NY Times profiles Dell CEO

Most folks who do not follow business closely are surprised to learn that Michael Dell has not been the chief executive officer of Round Rock, Texas-based Dell, Inc for almost two years now. This NY Times piece profiles Dell's CEO, Kevin B. Rollins, and, although Mr. Dell is no longer CEO, it sounds as if Mr. Dell is still, might we say, "involved" in the company's day-to-day operations:

[Messrs. Dell and Rollins] do work closely together, figuratively and literally. Their large wooden desks face one another in adjoining offices separated by a glass wall and a glass door. [EMC CEO Joseph] Tucci says he has visited those offices about 50 times and has never seen the door closed. "The way those two guys get along is not an act," Mr. Tucci said. "I can start a conversation with Michael, and two weeks later finish it with Kevin. They know what each other is thinking."

Posted by Tom at 8:02 AM | Comments (1) |

September 10, 2005

Take this job and shove it

The Lazard investment banking empire -- Paris-based Lazard Frères & Cie., London-based Lazard Brothers, and New York-based Lazard Frères & Co. -- recently conducted the largest initial public offering by an investment bank since Goldman Sachs went public in 1999. The move was not without critics, particularly among certain sectors of the Lazard workforce. The following is the departing email of one of those critics to his fellow Lazard employees, as noted by the NY Times:

I will be leaving Lazard effective tomorrow after more than 32 years with various firms of the Group around the world. I will be pursuing my career in the general unemployment line, as I am neither old enough nor wealthy enough to retire. I wish myself every good fortune in the future.

I am leaving on the high note of the IPO of Lazard with the knowledge (i) that I will be contributing to the stated intent of reducing the employment costs at Lazard by a total of more than US$ 180 million per year and (ii) that I will not have to comply with the non-disparagement provisions contained in the agreement between Lazard and the "Historical Partners".

I wish to congratulate the Head of Lazard for his success in selling the Lazard IPO to the investment public and to most (!) of Lazard's "Working Members". This will probably be judged in years to come not only as an even bolder act of financial wizardry than the sale of Wasserstein Perella, but also as a gesture of extraordinary altruism, since it was essentially done - from a cash point of view - for the benefit of the Historical Partners.

I wish every success to the Lazard Working Members in their task of working down Lazard's mountain of debt and hopefully ultimately returning to a situation where the tangible book value attributable to their own (still indirect) interests in Lazard Ltd. will again be positive.

Finally, let me say how gratifying it is, as the only direct descendant of the founding Lazard brothers currently employed in the Group, to sever ties with Lazard around the same time as my distant uncle Michel David-Weill who was the last family member (albeit not a direct descendant of the founding brothers) to run the firm.

Bernard Sainte-Marie

Posted by Tom at 8:24 AM | Comments (0) |

Disassembling Dowd

Will Wilkinson is a policy analyst at the Cato Institute in Washington and runs the smart Fly Bottle blog. In this TCS Central piece piece (blog link here), Mr. Wilkinson deliciously exposes the muddled thinking behind three recent op-eds written by NY Times columnist Maureen Dowd, Washington Post columnist Harold Myerson and NY Times columnist Paul Krugman that all contend that the principles of limited government and economic libertarianism caused the tragedy in New Orleans.

When I read Ms. Dowd's piece earlier in the week, it occurred to me that her remark "when you combine limited government with incompetent government, lethal stuff happens" rather naively presumed that less limited but competent government is a realistic alternative. However, Mr. Wilkinson's op-ed takes that observation several steps further and concludes:

Dowd, Krugman, and Meyerson evidently loathe free markets and limited government. And they also loathe the Bush administration. Apparently it would be nice for them if they could bundle their hatreds into a package of loathing, tie it up in spite, and burn it. So they try. But the package won't hold together, and they can't bash Bush without burning themselves. The most cursory inspection of the front page indicates that the difference between him and them is simply the details of their hostility to economic freedom and small government.

Read the entire piece for some refreshing clear thinking.

Posted by Tom at 7:42 AM | Comments (2) |

September 9, 2005

Katrina's economic ripples on Houston

Following on this post from earlier in the week regarding the economic impact to Houston of the arrival of thousands of former New Orleans residents, Tyler Cowen over at Marginal Revolution provides his typically insightful analysis on the issue. Tyler notes that there are economic benefits and costs attributable to the arrival of the former New Orleans residents, and concludes:

Both the costs and benefits of resettlement will be overstated by partisans. The Houston boom won't last long, and the costs will net out to put the city in a roughly break-even position.

My sense is that Tyler's view is largely correct because most of New Orleans' larger businesses that could provide a big employment boost for Houston (i.e., the port, refineries, etc.) will remain in New Orleans due to the huge capital investments there. The one difference with the exodus from New Orleans from other analogous circumstances is the decimation in New Orleans of small businesses, which were the largest employer in the area. The jobs with the big employers will return to New Orleans relatively quickly, but the replenishment of the supply of jobs attributable to small businesses -- particularly small service companies -- will take much longer because a huge number of those businesses were wiped out by the storm and do not have the capital or demand necessary to re-start their business in the New Orleans area any time soon. Whether any significant number of those jobs are ultimately re-created in the Houston economy remains to be seen.

On a related economic note, the Chronicle's business columnist, Loren Steffy, has a good column in which he notes the prejudicial impact that the Bankruptcy Amendments of 2005 will have on many people who have been rendered insolvent as a result of Hurricane Katrina, not the least of which is the fact that such amendments increase the cost considerably of filing an individual bankruptcy case.

Posted by Tom at 7:26 AM | Comments (0) |

Judge Lake's letter-writing campaign

In a hearing yesterday afternoon in Houston federal court, U.S. District Judge Sim Lake continued to grapple with strong evidence that the Enron Task Force has engaged in a systematic campaign of intimidating witnesses in the upcoming trial of former Enron chairman Ken Lay, former CEO Jeff Skilling, and chief accountant Richard Causey from conferring with or testifying with the defendants and their counsel. As noted in earlier posts here, here and here, in each of the three criminal trials that the Enron Task Force has prosecuted to date -- the Andersen case, the Nigerian Barge case, and the Enron Broadband case -- the Task Force threatened numerous material witnesses with indictment who would have testified favorably for the defense in each case but for such intimidation. Particularly in the Andersen case and the Nigerian Barge case, the Task Force was able to use the intimidation tactics to turn weak cases into convictions by preventing the jury in each case from hearing key testimony from dozens of witnesses who would have been favorable for the defense. The Task Force has continued its witness intimidation tactics in the Lay-Skilling-Causey case, as reflected by the prosecution's fingering of the record-setting number of 114 alleged co-conspirators in the case.

As reported in this Mary Flood article on the hearing, Judge Lake has decided to send a letter personally next Tuesday to each lawyer representing at least 38 potential witnesses in the case encouraging them to allow their clients to meet and confer with the Lay-Skilling-Causey defense team, and advising them that the Enron Task Force will not be allowed to take any action against the clients or counsel in retribution for meeting with the defendants and their counsel. Although not a grant of immunity from prosecution for any testimony that a witness would give in the case, Judge Lake's letter will constitute a substantial impediment to any future attempt by the Task Force to prosecute a presently unindicted witness who elects to confer with the Lay-Skilling-Causey defense team. Judge Lake also indicated that he may, at the request of any witness, conduct a hearing in which the witness would be allowed to explain the circumstances of any Task Force intimidation, and he would consider additional alternatives to protect witnesses from any Task Force retribution. Finally, Judge Lake continues to hold the Lay-Skilling-Causey motion to dismiss the Task Force's indictment against them under advisement, so he is reserviing his right to take further action in regard to the situation, particularly if even more evidence of Task Force intimidation of witnesses arises as a result of his letter writing campaign.

Although a significant development, it remains unclear whether Judge Lake's letters will have any meaningful effect on a systemic problem that the Task Force's approach to the Enron criminal cases has caused. Even with Judge Lake's assurance that the Task Force will not be allowed to indict a witness who cooperates with the defense, most criminal defense attorneys are inclined to play it safe and advise their clients that, absent a grant of immunity from prosecution arising from their testimony, remaining silent and not cooperating with the defense is the only sure way of not raising the ire of the Task Force. Consequently, defense counsel for witnesses may be inclined to advise their clients to hold out from conferring with the defense until Judge Lake considers a grant of immunity from any future prosecution that might arise from their testimony in the case.

Nevertheless, the Lay-Skilling-Causey motion to dismiss has raised a highly troubling issue for Judge Lake in this case and for the criminal justice system in general -- what to do when the government's systematic approach to prosecuting related criminal cases is not to determine the truth of what happened in each case through a full evaluation of the facts as described by all material witnesses, but to promote a false version of the facts in each case by intimidating favorable defense witnesses from testifying? Although Judge Lake is clearly attempting to find a solution to the problem that is short of dismissing the Task Force's case entirely, it may well be that a wholesale grant of immunity from prosecution to all material witnesses is the only remedy that will level the playing field and allow a full consideration of the facts during the trial from all material witnesses. That such an extreme measure is necessary to achieve a fair trial is a daunting reflection of the lengths that the government will go to criminalize business in this post-Enron era.

Posted by Tom at 5:02 AM | Comments (3) |

Houston Texans, Year Four

As the fourth season of the Houston Texans begins this Sunday in Buffalo against the Bills, Houston professional football fans no longer consider the Texans an NFL expansion franchise. As a result, it's now put up or shut up time for a franchise that has largely received a free pass from a fan base that, for the first three seasons of the team's existence, was simply thrilled that the National Football League had returned to Houston.

That inherited goodwill is pretty well used up, as the boo-birds let the Texan team members know during an awful final regular season loss last season to the moribund Cleveland Browns. That debacle blew the opportunity for the Texans to finish the season at an even 8-8. Nevetheless, a 7-9 record for a third year franchise is still respectable, and the Texans do have a number of positive factors working in their favor, not the least of which is a wonderful fellow in owner Bob McNair. So, even with the team's generally awful 2005 pre-season performances, there remains an air of cautious optimism regarding the Texans' chances this season.

The Texans' 2004 season was an odd one as the team was wildly inconsistent, either combining a good defensive game with a poor offensive one or a lousy first half performance in a particular game with an inspired second half effort. The team's first (against San Diego) and last (against the Browns) games were awful, but the Texans recovered from the San Diego loss to win four of six games to rise to a 4-3 season by midseason. Then, despite some close games, the Texans faded to 3-6 down the stretch to end the season at 7-9.

Some aspects of the Texans 2004 performance were very encouraging. Andre Johnson bloomed into an All-Pro receiver and QB David Carr had his second and third 300 yard passing games, flinging five TD passes and only one interception in those games. The defense laid the wood to division rival Jacksonville in two games, allowing a total of six points and forcing four turnovers. One of the Texans' two first round draft picks in the 2004 NFL draft -- CB Dunta Robinson -- was spectacular all season, which included a two-interception game against the Raiders and a two-sack game against the Colts. After overcoming nagging early season injuries, RB Domanick Davis was one of the best running backs in the NFL with a 4.5 per carry average and ten TD's.

Unfortunately, the three big issues for the Texans going into the 2004 season -- a deficient offensive line, the lack of a pass rush and mediocre play at quarterback -- remain the team's big question marks going into this season. Although the Texans football management team of GM Charlie Casserly and Head Coach Dom Capers have done a solid job of developing the team over its first three seasons, the fact that the team's main problems beginning this season are the same ones that existed before last season is a reason for Mr. McNair to pause and contemplate the direction of the franchise.

The Texans did make an unsuccessful off-season run at signing All-Pro Orlando Pace in an effort to shore up the troublesome offensive left tackle position that still has not recovered from the ill-fated Tony Boselli deal. However, after Pace re-signed with the Rams, the Texans settled on mediocre Saints right tackle Victor Riley to provide competition for Seth Wand, the Texans' starting left tackle last season who was overmatched in only his second season out of Division II college football. Riley has beat Wand out during the pre-season, which does not bode well for the prospect of the offensive line improving much this season. The other members of the unit are reasonably capable and durable, but no one will mistake this unit for the OLine of the Broncos or the Chiefs. Which begs the question -- why on earth is Texans management giving OG Chester Pitts -- who leads NFL offensive linemen in penalties over the past two seasons -- a lucrative new contract?

On the defensive side, Texans management decided after last season that this unit was getting too old, so the team jettisoned several of veteran players such as Aaron Glenn and brought in a new cornerback (the Raiders' Phillip Buchanon), two new linebackers and a rookie defensive lineman that the team selected in the first round of the draft (Travis Johnson). Nevertheless, 2004 first round draft choice, LB Jason Babin -- who is in the second season of making the transition, like Wand, from small college football to the NFL -- still has not shown the ability to pressure the passer consistently. Consequently, although younger and faster than last season's defense, it remains unclear whether this season's defensive unit will be any more effective than last season's unit in generating the type of pass rush that leads to turnovers and wins.

However, the most important element in the Texans' ultimate success remains the development of the franchise's first draft choice, QB David Carr. Carr has been the sacrificial lamb of a deficient offensive line during his first three seasons, so his lack of development is somewhat understandable. Nevertheless, he has a poor throwing motion that makes his passes prone to deflection at the line of scrimmage and he still has not shown the ability to pick up secondary receivers. Moreover, after completing almost 65% of his passes for an average of 270 yards per game in the first eight games of the 2004 season, Carr had a pedestrian 59% completion rate for an average of 172 yards per game in the final eight games. There is no way around it, that's a troubling trend.

Consequently, the Texans' upcoming season revolves around the development of Carr and the offensive line. If Carr and the OLine show consistent development, the Texans could finish 9-7. Add in a defensive unit that is more successful in putting pressure on opposing QB's and the team could reach 10-6, and be a viable candidate for a Wild Card playoff berth. On the other hand, if Carr and the OLine's inconsistent play of the past three seasons continues, then this could easily become a 5-11 or 6-10 team, which would not go over well in Houston's hard-knuckled pro football circles. If that happens, then the Texans' privileged existence as the city's conduit back to the NFL will end, and Mr. McNair will be dealing with the difficult task of selling a very high-priced product to an increasingly dissatisfied customer base.

Posted by Tom at 5:00 AM | Comments (5) |

September 8, 2005

The amazing Craig Biggio

Almost on cue, after I had written off those hitting-challenged Stros yet again, the amazing 39 year old Craig Biggio jacks a three-run, two out, top-of-the-ninth tater in his first at bat against old Stros buddy Billy Wagner to lead the Stros to an 8-6 victory and a series sweep of the Phillies.

My previous post projected that the Stros (75-64) needed to win 16 of their final 26 games to achieve the 88 wins that will probably be necessary to win the Wild Card playoff berth. Given their lack of hitting and downward trend in terms of wins and losses, I doubted that the Stros could do it. However, with the series sweep of the Phils, the club needs to go just 13-10 over their last 23 to hit that 88 win number. Stranger things have definitely happened.

The Stros have a weekender in Milwaukee (69-71) before returning home for a key seven game homestand, including a big four game series at the Juice Box on Monday through Thursday of next week with the Marlins (74-65), who are the Stros' main competition for the Wild Card. At this point in the season, the Marlins have a 59 combined RCAA/RSAA statistic (explained here), which is only marginally higher than the Stros' combined RCAA/RSAA of 54. So, the two main Wild Card contenders are fairly evenly-matched, although the Marlins are much better hitters than the Stros and the Stros pitching -- particularly their relief pitching -- is better than the Marlins' pitching.

Posted by Tom at 8:36 AM | Comments (1) |

Spellman and McGilbra sentenced

Almost overlooked in the Hurricane Katrina news is this Chronicle article regarding the sentencings of two former Houston officials -- Lee Brown Administration chief of staff Oliver Spellman and building services director Monique McGilbra -- who entered into plea bargains in connection with their testimony for the prosecution in the criminal trial of Cleveland entreprenuer Nate Gray. Both Mr. Spellman and Ms. McGilbra admitted that they accepted cash and gifts from Mr. Gray in connection with his attempts to gain their influence in approving him for lucrative city contracts.

Last Friday, Ms. McGilbra received a three-year sentence in the criminal case against here in Cleveland, Ohio, and she received a concurrent two and a half year sentence earlier this week on a related criminal case against her here. Mr. Spellman received probation and a $10,000 fine last Friday in Cleveland for taking a $2,000 bribe from Mr. Gray.

Earlier posts on the Gray trial and the related investigation of Brown Administration officials are here, here, here, here and here.

Posted by Tom at 6:14 AM | Comments (0) |

More on the criminalization-of-business lottery

Well, Bernie Ebbers is being allowed to remain free from his effective life sentence during the appeal of his conviction of defrauding WorldCom investors. The basis of the decision to allow Mr. Ebbers to remain free is that there are serious appellate issues in the case, including a jury instruction that the trial judge conceded ventured into "a thorny area of the law."

Does anyone really believe that Mr. Ebbers' appeal is stronger than the appeals of these defendants, each of whom's motion to remain free pending appeal was denied?

Ellen Podgor has more here.

Posted by Tom at 5:47 AM | Comments (0) |

United Airlines files its Disclosure Statement

United Airlines parent UAL Corp. filed its Disclosure Statement yesterday in its longstanding chapter 11 case in Chicago and it was not a pretty sight. United was the second major airline to seek bankruptcy court protection during the current downturn in the industry that started in 2001. US Airways Group Inc. is about to emerge from a chapter 22 bankruptcy (two chapter 11 cases in a three year period) and merge with America West Holdings Corp. Delta Air Lines and Northwest Airlines both are currently on the brink of chapter 11. Here are previous posts that chronicle the UAL bankruptcy saga.

The disclosure statement is the chapter 11 equivalent of an offering memorandum that provides creditors with background information on which they can make an informed judgment on the debtor's plan of reorganization. United's disclosure statement revealed that the company is seeking to emerge from bankruptcy by around Feb. 1, 2006, but that creditors holding unsecured claims would receive equity in the reorganized company worth only four cents to seven cents on the dollar of such claims. As is typical in such debt-for-equity plans, pre-bankruptcy holders of UAL's common and preferred stock will be wiped out under the plan. A February, 2006 emergence from bankruptcy would be three years and two months after UAL filed its chapter 11 case.

Not only is the return on creditors' claims not particularly robust under the UAL plan, the financial basis of even that paltry return does not even appear to be particularly sound. UAL contends that it will be profitable for each of the next five years, projecting that total liabilities will decline to around $14 billion in 2010 from over $27 billion this year. The business plan is built on an assumed oil price of $50 a barrel from next year through 2010, which is a historically high fuel cost, but would you want to make a bet on UAL based on that price? A safer bet is that UAL does not have the cash available to hedge and lock-in such fuel costs for that period.

Under United's plan, United employees and the Pension Benefit Guaranty Corp. (the federal pension insurer) will receive convertible notes in the reorganized debtor, with the emphasis on "convertible" because it appears unlikely that United will be in a position to pay such notes anytime soon. The PBGC has taken over all four of UAL's underfunded pension plans and represents about $10 billion of United's expected unsecured claims of about $28 million.

United is currently raising between $2.5 billion and $3 billion through a term loan and revolving credit facility to provide its plan "take-out financing" -- i.e., the funds necessary to repay its interim bankruptcy financing and to provide liquidity to fund its post-bankruptcy operations. Somewhat amazingly, the United disclosure statement suggests that the company continues to consider the alternative of raising additional capital through a rights offering or a public or private equity offering, including giving unsecured creditors the opportunity to buy $500 million in new UAL common stock. My sense is that UAL management need not stay up nights waiting for unsecured creditors to jump at that "opportunity."

After the reorganized company issues about 125 million new shares of common under its plan, UAL's disclosure statement estimates that the reorganized company will have an equity value of about $1.9 billion, which values the new shares at $15. The disclosure statement projects that the reorganized company would initially have $18 million in debt and liabilities compared with the $26 billion that it had before filing its chapter 11 case. Although the company states that it will have sufficient cash flow" to service debt and fund operations post-bankruptcy, a mere 30% reduction in liabilities under a debt-for-equity reorganization plan is not the usual prescription for robust post-bankruptcy business performance. The federal government -- through the PGBC -- better get ready to hold a large equity stake in the reorganized United.

Posted by Tom at 4:52 AM | Comments (0) |

September 7, 2005

Another Harvard Law view on the legacy of Chief Justice Rehnquist

Given this diatribe, it's refreshing to see that this more reasoned view on the legacy of the late Chief Justice William Rehnquist was also produced by a Harvard Law prof. The money quote follows, which the writer's colleague would do well to consider:

There is something charmingly modest, and deeply conservative, about that vision of law and governance. Conservatives have long believed that human nature disposes us to arrogance, that we're not as smart and not nearly as farsighted as we think we are. The world is a terribly complicated place. If I think I've figured it out, I'm bound to be wrong, maybe disastrously so. Those who run things should not be enforcing some ideological orthodoxy but muddling along -- looking for targets of opportunity, picking up money on the table, testing their intuitions against those of others. It's not a grand vision of how the Supreme Court or the White House should work. But perhaps all those grand visions -- there is no shortage of them -- will lead us to very bad places.

Posted by Tom at 11:42 AM | Comments (0) |

More on Katrina's economic ripples

As noted in this earlier post, the closing of the credit-card issuer Capital One Financial Corp.'s purchase of New Orleans-based Hibernia Corp. had been delayed by the aftermath of Hurricane Katrina. Today, the parties to that transaction announced that Hibernia had agreed to a 9% reduction in the purchase price as the price of the deal was reduced to $5.0 billion from the original price of $5.35 billion. Cap One had planned to close its purchase of Hibernia this week, but the acquisition is now scheduled to close in the fourth quarter.

Speculation over Hibernia's fate over the past week had fueled sharp swings in the company's stock price and heavy trading in its short-term options. The stock price dropped about 10% last week, but then partially recovered on Tuesday as investors became more confident that the deal involving Louisiana's biggest bank in New Orleans and in Louisiana. It holds about 30% of the metropolitan area's deposits and around 20% of the state's deposits, and about 15% of the bank's total deposits are concentrated in the New Orleans area. Over half of the bank's 100 or so branches in the hurricane-ravaged area are still closed, which includes about 20 branches that were largely destroyed and, thus, will not reopen anytime soon.

For a more macro-update on how the markets are dealing with the aftermath of Hurricane Katrina, check out James Hamilton's erudite analysis.

Posted by Tom at 10:02 AM | Comments (0) |

The Lay-Skilling-Causey motion to dismiss

As noted in earlier posts here and here, the longstanding suspicions that the Enron Task Force has been engaging in witness tampering in the Enron-related criminal cases is now in full public view. This Mary Flood article reports on the filing of the redacted version of Ken Lay, Jeff Skilling and Richard Causey's motion to dismiss the Task Force's indictment against them on grounds of prosecutorial misconduct and, according to Ms. Flood's article, the motion is a damning indictment of the Task Force's handling of the criminal investigation of Enron. Go to this link to download a copy of the Lay-Skilling-Causey motion, and here is a Washington Post article on the motion.

The motion and accompanying affidavit from law professor Michael Tigar are stunning in many ways. For example, counsel for the defendants note that they have sought to confer with over 100 witnesses and only four have agreed to do so after the Task Force earlier took the extraordinary step of naming 114 unindicted co-conspirators in the case. Mr. Tigar's affidavit states that "this level of silence is not normal" from witnesses and that "I have never seen defendants in a major public trial, especially a white-collar trial, so completely ostracized by witnesses with pertinent information." Mr. Tigar concludes:

". . . I have seen prosecutorial misconduct and litigated about it. However, in all my years handling criminal cases, and in all my experience teaching and working with other lawyers, I have never seen all of these unfair pressures brought to bear on the adversary system in a single case."

Similarly, the motion makes reference to a potentially explosive email from a Task Force prosecutor to a defense attorney for a cooperating government witness in one of the Enron cases. Although it is a bit difficult to surmise what's in the email because it has been redacted from the version of the motion that has been filed publicly, it appears from the motion that the e-mail told the lawyer for the cooperating witness to direct his co-counsel for the cooperating witness to stop talking to Mr. Skilling's lawyer or that he should "get rid" of him. The motion does not name the identity of the Task Force member who made that threat, but I have my suspicions.

Unfortunately, the public exposure of the Enron Task Force's misconduct comes too late to help the defendants in the Nigerian Barge case, whose defense was also undermined by the Task Force's designation of dozens of key defense witnesses as unindicted co-conspirators in the case. Here's hoping that U.S. District Judge Sim Lake puts a halt to this transparent abuse of governmental power and -- at very least -- provides each of the co-conspirators named in the Lay-Skilling-Causey case immunity from prosecution for their testimony in that case. It's about time that the truth about Enron be told, not some piecemeal prosecution version based on the dubious statements of witnesses who have been bludgeoned into plea bargains.

Meanwhile, one notable critic of the government's criminalization of Enron wonders whether the government will take the same approach with regard to its own actions in the debacle of New Orleans?

Posted by Tom at 7:15 AM | Comments (1) |

More on the illusory attorney-client privilege

Picking up on the subject of this post from a couple of months ago, this NY Times article notes that corporate targets of criminal investigations can no longer effectively rely on the attorney-client privilege protecting communications between corporate representatives and the company's attorneys.

Frankly, the destruction of the corporate attorney-client privilege is changing the landscape of American business. For example, my standard advice for a prospective chief executive of a publicly-owned company is to negotiate as a part of his employment agreement that the company pay for the executive's personal attorney to advise the executive in regard to his handling of corporate affairs. Similarly, I caution businesspeople considering taking on a board seat with a publicly-owned company not to do so unless the company provides separate counsel for the board. Absent such arrangements, the government's evisceration of the corporate attorney-client privilege has the ironic effect of making business executives and directors less likely to consult corporate counsel before before making critical business decisions because they know that counsel will rat them out in the event of a governmental investigation of the company.

Interestingly, the article notes that some people could care less about the demise of the attorney-client privilege, such as those who conclude first that a crime has occurred and then attempt to manipulate facts to support their conclusion. One of those is John R. Kroger, the Lewis & Clark Law School professor and former Enron Task Force prosecutor, whose law review article -- Enron, Fraud and Securities Reform: An Enron Prosecutor's Perspective -- is an appalling example of a non-expert in structured finance concluding that legitimate structured finance transactions of Enron were criminal and then attempting to manipulate the facts to support his thesis. Taking the same approach to the attorney-client privilege, the article quotes Mr. Kroger:

"It's really in the public's interest to get out on the table whether there's any possibility executives engaged in wrongdoing were really following legal advice or not."

Or, stated another way, the state's interest in criminalizing corporate conduct outweighs the individual's right to consult with an attorney candidly. That such people as Mr. Kroger are teaching this nonsense to future prosecutors at U.S. law schools is an ominous sign for American business interests.

Posted by Tom at 6:08 AM | Comments (0) |

Taking on a bully

Showing admirable disdain for the currently popular approach of bowing to governmental demagouges, money manager J. & W. Seligman & Co. fired off a civil lawsuit against New York Attorney General Eliot Spitzer seeking to enjoin his office from pursuing an investigation into whether the advisory fees that the firm charges investors in its mutual funds are excessive. A long line of posts chronicling the Aspiring Governor's manipulation of business interests to further his political career is here.

Seligman contends in its lawsuit that that the Securities and Exchange Commission has the exclusive authority to regulate advisory fees and, thus, Mr. Spitzer's office does not have the authority to pursue the investigation. The Aspiring Governor ratched up the pressure on Seligman when he utilized his usual tactic when a target company does not roll over and enter into a settlement -- he issued a flurry of subpoenas for documents involving fee negotiations between the firm and the independent directors of the Seligman Funds dating back to 1998. Mr. Spitzer's assault on Seligman is an offshoot of his 2003 campaign against the mutual fund industry in which he alleged fund companies allowed favored investors to make improper trades at the expense of long-term shareholders. In connection with prior settlements, about a dozen fund companies have cut advisory fees by an aggregate amount of almost a billion in addition to paying fines and other penalties.

Incredibly, Mr. Spitzer's office does not understand why Seligman isn't simply playing ball with the Aspiring Governor just like all the other fund companies that have rolled over under pressure. A spokesman for Mr. Spitzer's office was actually quoted as saying he could not understand why Seligman shouldn't "want to join other mutual-fund families making appropriate restitution and reducing inordinately high fees?"

Answer: Maybe because it's none of your business.

Posted by Tom at 5:31 AM | Comments (0) |

Gambling with your money, their lives

The title of this post is from Holman Jenkins' insightful Wall Street Journal ($) column today in which he decries the role of federally-subsidized flood insurance in promoting the risk-taking that helped turn New Orleans into a disaster waiting to happen:

Professions of shock about the extent of the New Orleans disaster may be understandable from the broader public, but not from Louisianians themselves. Their disaster was the most predicted disaster in recent memory. The city's vulnerability was well documented and this is one case where you can't blame the press for taking its eye off the ball.

The policy implications were not lost on congressmen and federal officials either. A screaming match three years ago concerned a House bill to charge market-based flood insurance premiums to homeowners who filed frequent claims. Louisiana Rep. Billy Tauzin (since retired) denounced the bill as "an assault on the culture of South Louisiana." He was right.

The bill's author, Rep. Earl Blumenauer, put the issue in less hysterical perspective: "The notion that the federal government is just going to shovel money to people in harm's way is misguided, and I personally think it's cruel." He was right too.

Modern New Orleans was the ultimate expression of this high-rolling dynamic. In 2000, an unnamed city official succinctly explained the city's hurricane strategy to the trade publication Risk & Insurance: "We are below sea level and we do get floods sometimes, but it's not a real serious problem. You can still purchase flood insurance."

. . . [a] corollary to the city's acceptance that sooner or later it would be destroyed by a hurricane (and rebuilt using insurance money) was a reliance on evacuation to spare human life in the event of a Category 4 or worse storm, of which there had been four since 1899. That would have meant evicting residents every time a hurricane threatened, a policy that likely would have collapsed after the first false alarm, had a decrepit municipal government cared enough to try it. Instead the city defaulted to an evacuation strategy that was tantamount to every man for himself until it's time to reassemble and collect the checks that will be rolling in.

Along the same lines, John Tierney in this NY Times op-ed suggested the following common sense approach to rebuilding New Orleans:

Here's the bargain I'd offer New Orleans: the feds will spend the billions for your new levees, but then you're on your own. You and others along the coast have to buy flood insurance the same way we all buy fire insurance - from private companies that have more at stake than do Washington bureaucrats.

Private flood insurance has come to seem quaint in America, but in Britain it's the norm. If Americans paid premiums for living in risky areas, they'd think twice about building oceanfront villas. Voters and insurance companies would put pressure on local politicians to take care of the levees, prepare for the worst - and stop waiting for that bumbling white knight from Washington.

Posted by Tom at 4:48 AM | Comments (0) |

September 6, 2005

Dershowitz on C.J. Rehnquist

Harvard Law prof Alan Dershowitz -- who certainly does not shy away from defending difficult positions -- displays that capacity again in this tirade toward the late and not-yet-buried Chief Justice William Rehnquist.

Professor Dershowitz is a reflection of the fact that intelligence does not equate with good judgment.

Posted by Tom at 9:21 AM | Comments (2) |

Thank you, Andersen and Enron

Allan Sloan in his Washington Post column has an interesting take on the Justice Department's decision not to indict KPMG over the firm's involvement in the creation and promotion of allegedly illegal tax shelters:

The government didn't dare file criminal charges against KPMG because an indictment alone would have driven it out of business, leaving us with too few big accounting firms to go around. KPMG was in this strong bargaining position because of the collapse of Enron's accounting firm, Arthur Andersen, which the government foolishly indicted on criminal charges three years ago.

In an unpublished paper, Emilie R. Feldman, a doctoral student at the Harvard Business School, makes a compelling case that the Final Four firms absorbing Andersen's business would have violated antitrust guidelines had it involved a sale rather than a collapse.

Feldman (disclosure: her family and mine are close friends) says having the Final Four absorb Andersen's business added 455 points to the Herfindahl-Hirschman Index, a tool that antitrust mavens use to measure business concentration. Any increase bigger than 50 points would have violated the relevant guidelines, she says.

In other words, a collapse brought about by the Justice Department prosecutors allowed the Final Four to acquire at no cost business that the Justice Department antitrust enforcers would never have let them buy. You have to love it.

And Mr. Sloan also notes why the penalty that KPMG will pay the government under its deferred prosecution agreement is not likely onerous enough to put the firm out of business:

To be sure, the penalty imposed on KPMG isn't chopped liver. It's $456 million, which is real money. But it's less than it seems to be, even though the deal forbids KPMG from deducting any of the money from taxable income. . . And you don't need a CPA to see that this deal is one of the bargains of the year.

KPMG generated $3.8 billion of revenue in the year ended Sept. 30, 2004. . . between 35 and 48 percent of that was pretax profit, which works out to at least $1.33 billion, an average of $787,000 per partner. But remember that the penalty is after taxes. So we'll assume an unrealistically high tax rate -- 40 percent -- for KPMG's partners. This would leave after-tax profit of about $470,000 per partner. The $456 million is about $276,000 per partner. So KPMG's partners are paying less than a year's profit to avoid being destroyed by a criminal indictment. Pretty slick.

The firm and the government say none of KPMG's payments will be covered by insurance. But the settlement calls for the government to get 50 percent of the first $288 million of insurance proceeds, should KPMG get any. (KPMG would keep anything above $288 million.) The settlement, the first $256 million of which was due last week, may end up costing KPMG less than the stated $456 million by the time it finishes paying next year.

So it's time for KPMG's partners to thank the gods of greed for creating the Enron scandal. Because if we hadn't had Enron, we might not have KPMG.

Posted by Tom at 7:38 AM | Comments (0) |

Houston's hope for the golf swing

Houston has a particularly rich golf heritage that is reflected by the fact that such golf notables as Jack Burke, Jr., Jimmy Demaret, Dave Marr, and Claude Harmon, Sr. lived here for much of their lives. The Chronicle's Steve Campbell notes one of the more low-profile Houstonians that has contributed to that rich tradition with this piece on golf instructor and golf course design expert, Jim Hardy, who has become sort of a last hope for several professional golfers who are struggling with their swings and ready to give up competitive golf.

Peter Jacobsen, Hardy's longtime business partner, was Hardy's first reclamation project. Although he had been a solid player on the PGA Tour from the late 1970's through the early 1990's, Jacobsen's golf game had fallen on hard times for several years when he revived his career in 1995 by changing from a two-plane swing (think Tom Watson, Hale Irwin, and Davis Love) to a one-plane swing (think Ben Hogan, Ernie Els, and Michelle Wie) through Hardy's tutelage. Hardy recently used his experience in changing Jacobsen's prior two-plane swing to a one-plane swing as the basis of an exceptional new book on golf swing instruction, The Plane Truth for Golfers (McGraw-Hill 2005).

In his book, Hardy identifies the two-plane swing and the one-plane swing as the two basic -- but much different -- golf swings. In so doing, he makes the key insight that much of golf swing instruction over the past generation has been counterproductive because of the failure of golf instructors to tailor their teaching to the particular golf swing that the student is using or should use. Inasmuch as the key elements of the one-plane swing are quite different from those of the two-plane swing, Hardy points out that attempting to teach two-plane concepts to a one-plane swinger (and vice versa) risks having the student adopt swing elements that are ill-suited for the student's particular swing.

As with Hogan's classic golf swing book Five Lessons, Hardy's Plane Truth for Golfers is only a little over 100 pages. However, take it from this self-taught golfer who has read dozens of golf instruction books over the past 25 years, Houstonian Jim Hardy's Plane Truth for Golfers is a landmark book in the area of golf swing instruction and another of the many contributions that Houstonians have made to the wonderful world of golf.

Posted by Tom at 7:01 AM | Comments (0) |

The Katrina business boom

This NY Times article provides a good summary of the response of the Houston business community to the aftermath of Hurricane Katrina and the business opportunity that it represents. The article focuses on the short term business opportunities, although the more signficant economic impact to the overall Houston economy would be the potential population and job growth that could result from the exodus of New Orleans citizens to Houston. Nevertheless, the article is an interesting read of how Houston businesses are responding to the aftermath of Katrina, so check it out.

Update: Tory Gattis has good insights into the probable long-term economic impact of the hurricane on Houston's economy.

Posted by Tom at 5:28 AM | Comments (2) |

An example of failed local leadership

Following on this earlier post and Joe Carter's post noted in the post below regarding the failures of the federal government in the Hurricane Katrina aftermath, former state legislator Bob Williams -- whose district was the most impacted by the Mount St. Helens eruption -- lays the wood to Louisiana Governor Kathleen Blanco and New Orleans Mayor Ray Nagin in this equally devastating Opinion Journal op-ed

The primary responsibility for dealing with emergencies does not belong to the federal government. It belongs to local and state officials who are charged by law with the management of the crucial first response to disasters. First response should be carried out by local and state emergency personnel under the supervision of the state governor and his/her emergency operations center.

The actions and inactions of Gov. Blanco and Mayor Nagin are a national disgrace due to their failure to implement the previously established evacuation plans of the state and city. Gov. Blanco and Mayor Nagin cannot claim that they were surprised by the extent of the damage and the need to evacuate so many people. Detailed written plans were already in place to evacuate more than a million people. The plans projected that 300,000 people would need transportation in the event of a hurricane like Katrina. If the plans had been implemented, thousands of lives would likely have been saved.

In addition to the plans, local, state and federal officials held a simulated hurricane drill 13 months ago, in which widespread flooding supposedly trapped 300,000 people inside New Orleans. The exercise simulated the evacuation of more than a million residents. The problems identified in the simulation apparently were not solved.

A year ago, as Hurricane Ivan approached, New Orleans ordered an evacuation but did not use city or school buses to help people evacuate. As a result many of the poorest citizens were unable to evacuate. Fortunately, the hurricane changed course and did not hit New Orleans, but both Gov. Blanco and Mayor Nagin acknowledged the need for a better evacuation plan. Again, they did not take corrective actions. In 1998, during a threat by Hurricane George, 14,000 people were sent to the Superdome and theft and vandalism were rampant due to inadequate security. Again, these problems were not corrected.

Mayor Nagin was responsible for giving the order for mandatory evacuation and supervising the actual evacuation: His office of Emergency Preparedness (not the federal government) must coordinate with the state on elements of evacuation and assist in directing the transportation of evacuees to staging areas. Mayor Nagin had to be encouraged by the governor to contact the National Hurricane Center before he finally, belatedly, issued the order for mandatory evacuation. And sadly, it apparently took a personal call from the president to urge the governor to order the mandatory evacuation.

The city's evacuation plan states: "The city of New Orleans will utilize all available resources to quickly and safely evacuate threatened areas." But even though the city has enough school and transit buses to evacuate 12,000 citizens per fleet run, the mayor did not use them. To compound the problem, the buses were not moved to high ground and were flooded. The plan also states that "special arrangements will be made to evacuate persons unable to transport themselves or who require specific lifesaving assistance. Additional personnel will be recruited to assist in evacuation procedures as needed." This was not done.

Instead of evacuating the people, the mayor ordered the refugees to the Superdome and Convention Center without adequate security and no provisions for food, water and sanitary conditions. As a result people died, and there was even rape committed, in these facilities. Mayor Nagin failed in his responsibility to provide public safety and to manage the orderly evacuation of the citizens of New Orleans. Now he wants to blame Gov. Blanco and the Federal Emergency Management Agency. In an emergency the first requirement is for the city's emergency center to be linked to the state emergency operations center. This was not done.

The federal government does not have the authority to intervene in a state emergency without the request of a governor. President Bush declared an emergency prior to Katrina hitting New Orleans, so the only action needed for federal assistance was for Gov. Blanco to request the specific type of assistance she needed. She failed to send a timely request for specific aid.

In addition, unlike the governors of New York, Oklahoma and California in past disasters, Gov. Blanco failed to take charge of the situation and ensure that the state emergency operation facility was in constant contact with Mayor Nagin and FEMA. It is likely that thousands of people died because of the failure of Gov. Blanco to implement the state plan, which mentions the possible need to evacuate up to one million people. The plan clearly gives the governor the authority for declaring an emergency, sending in state resources to the disaster area and requesting necessary federal assistance.

Posted by Tom at 5:00 AM | Comments (3) |

Not a good progress report

Although one whould caution against jumping to conclusions before facts are established, tongues will nevertheless be wagging across the United States today in the face of this devastating Wall Street Journal ($) article that lists the incidents reflecting lack of organization and preparedness in the federal government's response to the aftermath of Hurricane Katrina, including the following:

The U.S. Army has a large facility, Fort Polk, in Leesville, La., about 270 miles northwest of New Orleans. Officials at Fort Polk, which has nearly 8,000 active-duty soldiers, said their contribution so far has consisted of a few dozen soldiers from the 10th Mountain Division manning purification equipment and driving half-ton trucks filled with supplies and equipment. The first contingent of soldiers didn't receive orders until Saturday afternoon.

A spokeswoman at Fort Polk said she did not know why the base received its deployment orders so late in the game. "You'd have to ask the Pentagon," she said. A senior Army official said the service was reluctant to commit the 4th brigade of the 10th Mountain Division from Fort Polk, because the unit, which numbers several thousand soldiers, is in the midst of preparing for an Afghanistan deployment in January.

Instead, the Pentagon chose to send upwards of 7,500 soldiers from the 1st Cavalry Division at Fort Hood, Texas and the 82nd Airborne Division from Fort Bragg, N.C., along with Marines from California and North Carolina. Soldiers from the 82nd Airborne Division are able to deploy anywhere in the world in 18 hours. It took several days for them to arrive on the ground in Louisiana.

And you just knew that airport security had to have a hand in this mess, too:

Because of worries that terrorists could take advantage of such chaos, FEMA now must abide by post-9/11 security procedures, such as putting air marshals on flights. That meant stranded residents couldn't be evacuated from the New Orleans airport until FEMA had rounded up dozens of Transportation Security Administration screeners and more than 50 federal air marshals. Inadequate power prevented officials from firing up X-ray machines and metal detectors until the government decided evacuees could be searched manually.

The article reports that even basic logistical support was unorganized:

In the hours before and after Katrina struck, there weren't firm procedures in place for directing people and materials. Dan Wessel, owner of Cool Express Inc., a Blue River, Wis., transportation company that contracts with FEMA to move supplies, said he didn't get a green light to send trucks to a staging area in Dallas until about 4 p.m. Monday, hours after Katrina made landfall. That was too late to meet a deadline of getting trucks to Dallas by noon Tuesday, he said.

Once the trucks arrived, drivers often found no National Guard troops, FEMA workers or other personnel on hand to help unload the water and ice, Mr. Wessel said. "I almost told the guys to leave, but people are wanting the water," he said. "The drivers distributed it."

There is much more, so read the entire article, as well as Joe Carter's thoughtful piece on how America's current leadership failed in preparing the local leadership necessary to address a disaster of this magnitude.

As noted in this earlier post, "they fiddle while Rome burns . . ." But kidding aside, the apparent failure of the Department of Homeland Security in its first big test in responding to a natural disaster is sure making the decision to create that agency as a massive reshuffling of the deck chairs on the Titanic.

Update: Given the extent of disingenuous statements made by governmental officials, Ellen Podgor in this White Collar Criminal Prof blog post asks the following question:

[O]ne has to wonder if this reaches a level of criminality. And if not, should it?

By the way, don't miss watching this CNN/AOL video that exposes the contrary pre- and post-hurricane statements by Homeland Security chief Michael Chertoff and FEMA director Michael Brown (he of Grilled by Koppel fame). Devastating is too mild a word to describe the piece.

Posted by Tom at 4:55 AM | Comments (0) |

September 5, 2005

A terrific hurricane relief information resource

The Librarians' Index to the Internet has put together a terrific web resource center for Hurricane Katrina-related information, including information on volunteer opportunities, legal matters, displaced students, charitable giving, animal rescue, missing persons, temporary housing, flood control, levee management, gas prices, environmental factors, news sites, maps and images, and much more. Moreover, LII.org continually updates their webpages, so check back from time-to-time to review the resources added to the Hurricane Katrina webpage.

Man, those librarians sure can organize, eh? ;^)

Posted by Tom at 12:29 PM | Comments (0) |

One of the effects of mass transit choices in New Orleans

Awhile back, I participated with local bloggers Tory Gattis, Anne Linehan and Kevin Whited, Laurence Simon, Owen Courr?ges and several others on a lively thread regarding the causes and effect of the public policy choices that Houston is making in regard to Houston's Metropolitan Transit Authority and its light rail system. One of the points that I tried to make in that discussion was the political factors often prompt people who need mass transit the most to vote in favor of transit plans -- such as Houston's light rail system -- that really do not really address their needs, and that such choices often have long-lasting and unintended consequences.

Along those same lines, Randal O'Toole, senior economist at the Thoreau Institute, points out here that the public policy decisions regarding mass transit in New Orleans played a large part in the loss of human life that will result from Hurricane Katrina and the storm's aftermath:

Those who fervently wish for car-free cities should take a closer look at New Orleans. The tragedy of New Orleans isn't primarily due to racism or government incompetence, though both played a role. The real cause is automobility -- or more precisely to the lack of it.

"The white people got out," declared the New York Times today. But, as a chart in the Times article makes clear, the people who got out were those with automobiles. Those who stayed, regardless of color, were those who lacked autos.

What made New Orleans more vulnerable to catastrophe than most U.S. cities is its low rate of auto ownership. According to the 2000 Census, nearly a third of New Orleans households do not own an automobile. This compares to less than 10 percent nationwide. There are significant differences by race: 35 percent of black households but only 15 percent of white households do not own an auto. But in the end, it was auto ownership, not race, that made the difference between safety and disaster.

"The evacuation plan was really based on people driving out," an LSU professor told the Times. On Saturday and Sunday, August 27 and 28, when it appeared likely that Hurricane Katrina would strike New Orleans, those people who could simply got in their cars and drove away. The people who didn't have cars were left behind.

Critics of autos love the term "auto dependent." But Katrina proved that the automobile is a liberator. It is those who don't own autos who are dependent -- dependent on the competence of government officials, dependent on charity, dependent on complex and sometimes uncaring institutions.

As shown in the table below, the number of people killed by hurricanes in the U.S. steadily declined during the twentieth century. Economists commonly attribute such declines to increasing wealth. Wealth differences are also credited with the large number of disaster-related deaths in developing nations vs. developed nations. But what makes wealthier societies less vulnerable to natural disaster? There are several factors, but the most important is mobility.

Number of Deaths Caused by Hurricanes in the U.S.:

1900-1919 10,000
1920-1939 3,751
1940-1959 1,119
1960-1979 453
1980-1999 57

Source: Atlantic Oceanographic and Meteorological Laboratory. Number for 1900-1919 is estimated as the exact death toll from 1900 Galveston hurricane is unknown.

People with access to autos can leave an area before it is flooded or hit with hurricanes, tornados, or other storms. When earthquakes or storms strike too suddenly to allow prior evacuation, people with autos can move away from areas that lack food, safe water, or other essentials.

Numerous commentators have legitimately criticized the Federal Emergency Management Agency and other government agencies for failing to foresee the need for evacuation, failing to secure enough buses or other means of evacuation, and failing to get those buses to people who needed evacuation. But people who owned autos didn't need to rely on the competence of government planners to be safe from Katrina and flooding. They were able to save themselves by driving away. Most apparently found refuge with friends or in hotels many miles from the devastation. Meanwhile, those who didn't have autos were forced into high-density, crime-ridden refugee camps such as the Superdome and New Orleans Convention Center.

Rather than help low-income people achieve greater mobility, New Orleans transportation planners decided years ago that their highest priority was to provide heavily subsidized streetcar rides for tourists. In the late 1980s and 1990s, New Orleans spent at least $15 million converting an abandoned rail line into the 1.5-mile Riverfront Streetcar line. In 2004, New Orleans opened the 3.6-mile Canal Street streetcar line at a cost of nearly $150 million.
New Orleans was planning to spend another $120 million on a Desire Street streetcar line.

These tourist lines do nothing to help any local residents except for those who happen to own property along the line. The city was not deterred by table 7.2 on page 8 its own analysis of the Desire line showing that each new rider on this line would cost taxpayers more than $20.

About 26,000 low-income families in New Orleans don't own a car. If all the money spent on New Orleans streetcars from 1985 to the present had been spent instead on helping autoless low-income families achieve mobility, the city would have had more than $6,000 for each such family, enough to buy good used cars for all of them. Add the money the city wanted to spend on the Desire Street streetcar and you have enough to buy a brand-new car for every single autoless low-income family -- not a Lexus or BMW, certainly, but a functional source of transportation that would have allowed them to escape the current disaster.

While I don't think that buying low-income families brand-new cars is the best use of our limited transportation resources, it would produce far greater benefits than building rail transit. Studies have found that unskilled workers who have a car are much more likely to have a job and will earn far more than workers who must depend on transit. That is why numerous social service agencies have begun programs aimed at helping low-income families acquire their first car or maintain an existing one.

Yet when I point out the comparative benefits of providing mobility to low-income people vs. building rail transit lines to suburban areas that already enjoy a high degree of mobility, rail advocates often respond, "We can't let poor people have cars. It would cause too much congestion." Yes, as the Soviet Union discovered, poverty is one way to prevent congestion.

New Orleans is in many ways a model for smart growth: high densities, low rates of auto ownership, investments in rail transit. This proved to be its downfall. While the city was vulnerable from being built below sea level, many cities above sea level have proven equally vulnerable to storms and flooding. In the end, New Orleans' people suffered primarily because so many lived without autos, thus making them overly dependent on the competence of government planners.

As noted in this previous post, people are entitled to vote in favor of a mass transit system that does not really address their needs. However, they should not be misled in doing so as has often been the case with regard to past Metro referendums. If a part of Metro's long-term strategy is to make certain segments of Houston's population less "automobile-dependent," then one of the lessons of New Orleans and Hurricane Katrina is that we should make clear in any future Metro referendums that such a strategy can have deadly consequences in the event that an evacuation of Houston is required.

Hat tip to Peter Gordon for the link to Mr. O'Toole's piece.

Posted by Tom at 9:53 AM | Comments (8) |

Greg Norman steps up

It's not everyone who can make this type of contribution to the Hurricane Katrina relief effort:

Greg Norman is lending his personal helicopter to the Hurricane Katrina relief effort, just as he did after last year's destructive hurricane season.

Norman sent the helicopter to the greater Louisiana area Friday, and said it will remain in service for as long as a month. His pilot, Gary Hogan, will fly medical supplies and other items into the region.

"Our thoughts and feelings go out to everyone over there," Norman said.

Norman's estate on Jupiter Island, about 90 miles north of Miami, was damaged by hurricanes Frances and Jeanne last year. He lent his helicopter - which can carry about 1,000 pounds of supplies and shuttle small groups of patients and medics - to the recovery effort.

The Federal Emergency Management Agency contacted the helicopter's manufacturer in recent days seeking help, and word eventually got to Norman. FEMA will coordinate Hogan's flights and supply fuel.

"They need as much airlift as they can get," Norman said.

Posted by Tom at 9:23 AM | Comments (0) |

Bush nominates Roberts for Chief Justice

Showing my usual lack of prognostication ability with regard to Supreme Court appointments, President Bush this morning nominated the late Chief Justice William Rehnquist's former clerk John Roberts to replace Mr. Rehnquist as the Chief Justice of the United States Supreme Court.

Inasmuch as the nomination of Judge Roberts for Chief Justice requires another nomination by the President, the confirmation hearing on the prior nomination of Judge Roberts -- which was supposed to commence tomorrow -- will be delayed for a couple of weeks.

Posted by Tom at 7:26 AM | Comments (0) |

2005 Weekly local football review

Amidst the chaos resulting from Hurricane Katrina, at least a small amount of normalcy returned this past weekend as the local college football season kicked off. As with last season, I will pass along a brief summary of the local and notable college and professional games of the past week, and refer to links that provide more thorough analysis of particular games. Now, for this week's games:

Texas Longhorns 60 Louisiana-Lafayette 3

The Horns cruised in what amounted to a scrimmage against outmanned an outmanned and understandably distracted team from Louisiana-Lafayette, otherwise know as "La-La" in football circles. However, the price of poker goes up considerably this coming Saturday as the Horns travel to Columbus, Ohio to face a fellow top 10 ranked Ohio State team.

Although the Longhorns have finished in the Top 12 for five straight seasons, have 16 starters returning and are coming off an 11-1 season and a dramatic Rose Bowl victory over Michigan, the long shadow of Darrell Royal still looms over Mack Brown and his embarrassing 1-12 record against top five-ranked teams, which includes a grating five straight losses to Brown's nemesis, Bob Stoops and Oklahoma. In my view, UT really has only five reasonably tough games on its schedule this season, and the game against Ohio State is one of only two that are true away games (the other true away game is with A&M in College Station to end the season, although the Horns do play a quasi-away game against OU in Dallas). With expectations sky high in Longhorn-land, the Ohio State game will likely set the tone for the Horns' season.

By the way, for extensive analysis of all things relating to the Longhorns, check out the All Things Longhorn blog.

Clemson 25 Texas Aggies 24.

In Dennis Franchione's first season in 2003, an undermanned Aggie squad had one of the worst defenses in the past 20 seasons of Aggie football. In his second season last year, the Aggies were one of the most improved teams in college football, but struggled to stop the run against top-flight competition and ended the season with embarrassing losses to Texas and Tennessee.

Now, in his third season, Coach Franchione has his most talented team and is armed with an improved contract that pays him over $2 million per year. The result in the first game? The Aggies can still not stop the run against top flight competition and, to make matters worse, the Aggies certainly did not get their money's worth in regard to Coach Franchione's blown decision not to go for two points midway through the 4th quarter that would have given the Ags a three point lead and, as the game turned out, a chance to win in overtime.

The Ags have three straight games at home against weak teams before traveling to Colorado on October 8th, so the restless in Aggieland will calm down a bit by then. But even though this is Franchione's most talented Aggie team, a tough conference schedule -- away games against Colorado, Kansas State, Texas Tech and Oklahoma, and a home game against Texas -- means that even an improved Aggie team may not have as good a record as last season's 7-4 slate.

Note to Coach Fran -- you really do not want to go there.

By the way, for more thorough analysis of all things relating to Aggie football, check out Texas A&M and Baseball in No Particular Order.

Oregon 38 Houston 24

Last season, Houston's offensive line resembled a huge sieve and its defense could not even shut down a hard-charging marching band.

In its first game this season, Houston's offensive line resembled a huge sieve and its defense would have had problems stopping Oregon's marching band.

Some things never change. The Coogs look like a 4-7 team to me.

TCU 17 Oklahoma 10

Does anyone really question anymore that Jason White was an extraordinary college quarterback?

The Sooners were the most talented and experienced team in college football last season -- NFL teams drafted the incredible number of 10 players off that squad, including two players in the first round and three in the second. However, for the second straight season, the Sooners laid an egg in the National Championship game, and the 2005 edition returns only nine starters off last season's talented team. So, the Sooners -- despite a load of very good young talent -- are clearly in rebuilding mode, and the TCU game reflected that fact in spades.

The following are a few questions that OU fans should be asking after the TCU debacle:

After the loss of three starters (including an Outland Award winner) and a top reserve, will the Sooners offensive line develop quick enough to allow the Sooners to score enough to be a serious contender for the Big 12 South title?

Despite the o-line problems, how is it that Adrian Peterson, the best running back in college football, only had eight carries in the first half of the TCU game?

Did an experienced offensive line and Jason White's excellence as a college QB cover-up Chuck Long's deficiencies as an offensive coordinator?

Stay tuned for the answer to these questions.

Rice opens its season this Saturday in L.A. against UCLA (1-0), and the Texans open their season this Sunday against the Bills in Buffalo. Look for my pre-season analysis of the Texans later this week. Also, for more detailed analysis of Big 12 games, check out Kevin Whited's weekly posts over at PubliusTX.Net, which ought to crank up in another week or two.

Posted by Tom at 5:45 AM | Comments (0) |

Stros 2005 Review: It's not looking good for the Stros

Despite the best pitching season in the club's history, the Stros' (72-64) chronic lack of hitting is making it increasingly unlikely that the team will be able to win enough of their final 26 games to secure the National League Wild Card Playoff berth for the second straight season.

Thus, after getting back into the NL Wild Card playoff race with a 47-22 streak after their abysmal 15-30 start, the Stros are now 10-12 over their last 22 games, which is probably more representative of this Stros club's overall ability-level. My sense it will take 88 wins to secure the Wild Card playoff spot this season, so the Stros would have to go 16-10 over the rest of the regular season to achieve that number of wins. Based on the way the club is hitting, that's not likely.

Here are the Stros hitters' individual runs created against average ("RCAA," explained here) through Saturday's games, courtesy of Lee Sinins:

Morgan Ensberg 36
Lance Berkman 22
Craig Biggio 6
Orlando Palmeiro 4
Jeff Bagwell 1
Charles Gipson 0
Jason Lane -1
Luke Scott -2
Todd Self -4
Jose Vizcaino -5
Eric Bruntlett -7
Humberto Quintero -7
Raul Chavez -10
Chris Burke -12
Willy Taveras -12
Brad Ausmus -15
Adam Everett -16
Mike Lamb -20

The Stros overall have a hideous -42 RCAA, which is 13th among the 16 National League teams. To make matters worse, Manager Phil Garner continues to do his best imitation of Jimy Williams by making moves such as playing Mike Lamb (-20 RCAA/.247 OBA/.368 SLG/.615 OPS) -- who has had a perfectly hideous season -- in place of Jason Lane (-1/.304/.490/.794) -- who has been one of the club's better hitters since the All-Star break -- on this past Saturday night. Down the stretch drive, Garner would be well-advised to play Lane, Orlando Palmeiro (4/.360/.490/.850), and AAA Round Rock slugger Luke Scott in the outfield and leave Willy Taveras (-12/.328/.346/.674) and Chris Burke (-12/.306/.363/.669) on the bench, but don't count on that happening. Garner, as with Williams before him, is proving not to be the bench manager that a team needs to steer a poor-hitting team through a pennant race.

Meanwhile, the Stros remain in the Wild Card playoff race solely because of their outstanding pitching. Here are the Stros pitchers' individual runs saved against average ("RSAA," explained here) through Saturday's games:

Roger Clemens 57
Andy Pettitte 36
Roy Oswalt 30
Dan Wheeler 17
Brad Lidge 13
Chad Qualls 8
Mike Gallo 2
Travis Driskill 0
Scott Strickland 0
Chad Harville -1
Russ Springer -4
Mike Burns -5
John Franco -5
Brandon Backe -9
Brandon Duckworth -12
Ezequiel Astacio -13
Wandy Rodriguez -18

The Stros pitching staff's aggregate 90 RSAA is second to the Cardinals staff's 123 among the 16 National League teams. The Rocket, Pettitte and Oswalt continue to be first, third, and fifth among National League pitchers in RSAA, which is one of the finest seasons by three starting pitchers on one staff in modern baseball history. The Stros' pitchers really do have a pretty good lack of support lawsuit against the club's hitters.

The Stros now go on the road for a key three game series in Philadelphia against the Wild Card playoff-leading Phillies (73-64) and then a weekender against the Brew Crew (67-70) before returning to the Juice Box for a big four game series next week against the Marlins (72-64), who remain the most team most likely from a statistical standpoint to win the Wild Card playoff berth.

Posted by Tom at 4:05 AM | Comments (0) |

Willy Taveras

The subject of the sixth segment in our ongoing series about the key Stros players (previous posts here, here, here, here, and here) is Willy Taveras, who represents a good example of how people who do not examine the facts often poorly evaluate the ability of ballplayers.

As noted in this earlier post, if all you listened to was the Stros' P.R. machine and Stros play-by-play announcer Milo Hamilton, then you would think that Taveras is the odd's-on favorite to win the National League Rookie-of-the-Year Award. "He's so fast!" "He leads the league in bunt hits!" "He has more hits than any other rookie!" These are just a few of the breathless comments that one commonly hears about Taveras from most Houston media types (with the notable exception of Charlie Pallilo).

Well, Taveras might win the Rookie-of-the-Year Award, but it would be because there is a far below-average rookie class in the National League this season, not because Taveras is a particularly good player. In fact, Taveras is not even an average player at this stage of his development. As noted in his statistics below, Taveras has a -12 RCAA, which means that he has produced 12 fewer runs so far this season than an average National League hitter would have generated in the same number of plate appearances. In almost every key offensive category -- on-base average, slugging percentage, OPS, etc. -- Taveras is not only below average, but far below average. Only because of the average nature of his batting average -- which happens to be among the most misleading of hitting statistics -- is Taveras considered by superficial observers to be a budding star. Even Taveras' defense in centerfield -- which was supposed to be quite good due to his excellent range -- has been surprisingly average to below-average because of below-average recognition skills.

Having said all that, it's far too early to write Taveras off. He has done a decent job of making the difficult jump from Double A ball to the National League. He is only 23 and still has time to improve. But Taveras has produced only a paltry 22 walks and 18 extra base hits in 550 career plate appearances, so it's far too early to pencil him in as the future Stros centerfielder or even as a sure-fire part of the Berkman-Oswalt-Ensberg-Lidge nucleus of the club over the next five seasons. If he can improve his walk rate to raise his on-base average to around .380 or so, and improve his power to an average or just below-average slugging percentage, then Taveras can be a reasonably effective National League player. But he's not there yet, and awarding him the Rookie-of-the-Year Award for a far below average season is not the way to point out his deficiencies to him.

Taveras' stats are here.

Posted by Tom at 4:02 AM | Comments (2) |

Willy Taveras statistics

Willy Taveras
YEAR	AGE	RCAA	OBA	SLG	OPS	AVG	HR	RBI	SB	G
2004	22	0	.000	.000	.000	.000	0	0	1	10
2005	23	-12	.330	.349	.679	.294	3	27	31	130
CAR		-12	.330	.348	.678	.294	3	27	32	140
LG AVG		0	.339	.429	.767	.269	15	64	8
POS AVG		-2	.338	.422	.760	.270	15	56	14

Posted by Tom at 4:00 AM | Comments (0) |

September 4, 2005

Ramping up the blame game

As noted here earlier, I don't think it's the time to point fingers at each other while there are still people to be saved inside New Orleans, although I do think the question of why troops were not used earlier to re-establish civil order is a reasonable one.

However, among the early analysis of what went wrong with the various governmental responses to the aftermath of Hurricane Katrina, this Washington Post article makes it clear that the Bush Administration is not going to take all the blame for various shortcomings:

Behind the scenes, a power struggle emerged, as federal officials tried to wrest authority from Louisiana Gov. Kathleen Babineaux Blanco (D). Shortly before midnight Friday, the Bush administration sent her a proposed legal memorandum asking her to request a federal takeover of the evacuation of New Orleans, a source within the state's emergency operations center said Saturday.

The administration sought unified control over all local police and state National Guard units reporting to the governor. Louisiana officials rejected the request after talks throughout the night, concerned that such a move would be comparable to a federal declaration of martial law. Some officials in the state suspected a political motive behind the request. "Quite frankly, if they'd been able to pull off taking it away from the locals, they then could have blamed everything on the locals," said the source, who does not have the authority to speak publicly.

A senior administration official said that Bush has clear legal authority to federalize National Guard units to quell civil disturbances under the Insurrection Act and will continue to try to unify the chains of command that are split among the president, the Louisiana governor and the New Orleans mayor.

As one my former professors used to remind me, "they fiddle while Rome burns and, to make matters worse, they do not realize that Rome is burning or that they are fiddling."

Meanwhile, this City Journal article is a pretty darn astute analysis of what happened last weekend in New Orleans. Hat tip to Tom Smith over at the Right Coast for the City Journal piece.

Posted by Tom at 3:41 PM | Comments (3) |

A massive relief effort that you do not see

As Americans are still attempting to absorb the shock of the largest exodus of citizens during our nation's modern history, the Chronicle's Steve Campbell's great photo of the inside of Houston's Astrodome provides the backdrop to a huge part of the Hurricane Katrina relief effort that you do not see on television -- the massive effort by a network of Houston-area churches and charities to provide relief resources to the tens of thousands of Gulf Coast evacuees who are residing in hotels and homes throughout Houston and Texas.

Although the evacuees from New Orleans are understandably getting most of the attention from the mainstream media, hotels and shelters from the Texas-Louisiana border to throughout the Houston-Dallas-San Antonio triangle are filled with tens of thousands of other Gulf Coast evacuees. The largest concentration of evacuees in Texas remains at Reliant Park in Houston, where about 25,000 people are currently located and, as of Sunday, another 7,200 will be located at the George R. Brown Convention Center in downtown Houston. In addition to those evacuees, an estimated 170,000 other people from Louisiana and Mississippi are staying with friends or relatives, or in hotels in the Houston area. A spokesman for Houston's hotel owner's association estimates that about 45,000 of the Houston area's 55,000 hotel rooms are occupied by Gulf Coast evacuees.

As a result of the surge of evacuees, city and county officials shifted gears on Saturday and turned Reliant Park into a medical way station where newly arriving evacuees are assessed as to their medical needs. The injured or sick are taken off to either the onsite medical facility or the nearby Texas Medical Center, and then the healthy are given a meal and transferred to new shelters being opened in Huntsville, Corpus Christi and Lubbock. On Saturday, at the Reliant Park medical clinic, about a 1,000 volunteer doctors, nurses and other medical personnel treated 3,500 evacuees and sent about 100 of those to area hospitals. Doctors gave about 2,000 tetanus shots to people who were injured during their ordeal in the hurricane and its aftermath.

Meanwhile, Houston-area churches and charities continued organizing a massive relief effort on behalf of both the evacuees at the main shelters and others outside those shelters. A group of Houston churches raised about $4 million for a month's worth of meals at Reliant Park and the Brown Convention Center and to provide volunteer servers for those meals. Either a large church or several churches will be handling service of those meals each day over the next couple of months, and members of my family and I will be serving meals on Tuesday, September 20 as my family's church handles the food service operation on that day.

In addition to those efforts at the main shelters, the network of churches and local charities are also setting up the infrastructure necessary to provide relief to the tens of thousands of evacuees who are located around the Houston area outside of the main shelters at Reliant Park and the Brown Convention Center. Representative of that overall effort are the services being provided by my family's church in the South Montgomery County area of Houston, where our church is providing relief services to evacuees in three local hotels. Literally hundreds of other Houston-area churches and charities are providing similar services, including Second Baptist Church, First United Methodist in downtown Houston, Fellowship of The Woodlands, Chapelwood United Methodist, Lakewood Church, St. Luke's United Methodist, Windsor Village United Methodist, Christ United Methodist Church, the Catholic Churches of the Houston-Galveston Archdiocese and the remarkable Houston Food Bank. If you are not affiliated with a church or charity that is involved in this effort, Charles Kuffner provides this informative post on information on how to get involved.

So, although the relief effort that is going on at Reliant Park and the Brown Convention Center is certainly important and compelling, it is equally important to recognize that there is an even bigger relief effort ongoing at the same time that addresses the needs of over a hundred thousand people who are not at the more visible shelters. That this massive relief effort has been put together literally behind the scenes in less than five days is yet another reason why Houston is one remarkable place.

Posted by Tom at 12:49 PM | Comments (2) |

Updating Katrina's economic ripples

Six days after Hurricane Katrina hammered a main conduit of the U.S. energy and shipping industries, much of the crucial infrastructure on the energy industry in the Gulf Coast region those remains shut down. Although a full assessment of the status of the region's infrastructure still cannot be made because of the post-storm chaos, it is becoming increasingly clear that refining and production capacity in the region will be curtailed for a prolonged period of time. Earlier posts on the developing economic effects of Katrina over the past week are here, here, here, here, here and here.

First, the impact on refining capacity. The storm shut down about two million barrels a day of crude-oil refining capacity. That translates to the loss of about one million barrels a day of gasoline production, which is about 10% of total U.S. demand. It is now apparent that at least four refineries that together generate about 5% of U.S. oil-refining capacity will be down for at least a month as those facilities are repaired. Meanwhile, damage to production capacity has also been extensive. Although production is coming back on-line slowly, it's becoming clearer that it will take at least several weeks -- and perhaps months -- for production levels to return to near pre-Katrina levels.

As noted here, the International Energy Agency ordered the release of two million barrels a day of crude oil, gasoline and other fuels on to the world market from their strategic stockpiles over the next month and, in response, gasoline and crude-oil futures fell on the Nymex Exchange for the first time since the storm. But the IEA's move refects that the world is now running partly on its fuel reserves that have been set aside for emergency use. Inasmuch as the amount of spare production capacity on the world market is particularly thin at this time, any further blips on the energy supply or demand radar screens would have even greater economic impact than those we are already experiencing.

Similarly, the news on the production side of the energy industry is not particularly optimistic, either. Six days into the recovery from Katrina, energy producers have been able to restart about 250,000 barrels a day of oil and 3 billion cubic feet of daily gas production that had shut down in anticipation of the storm. In comparison, six days after the smaller Hurricane Ivan last year, energy producers had restarted almost 850,000 barrels a day of oil and 4.1 billion cubic feet of natural gas. In addition to the extensive damage to offshore drilling and production facilities, roads and waterways, a big reason for the slow recovery is a practical problem -- the service companies that provide transportation and equipment for damage assessment and repair along the Gulf Coast are also in a state of chaos. Many of those companies' employees are homeless and living temporarily elsewhere, complicating the damage assessment process greatly. As a result, concrete information on the status of offshore production facilities and pipelines remains sketchy, at best.

Finally, at least indirectly tied to the dislocation of gasoline supplies resulting from Hurricane Katrina, don't miss James Hamilton's witty analysis of California Attorney General and demagouge Bill Lockyer's incredibly disingenuous plan to keep California gasoline prices low.

Posted by Tom at 11:40 AM | Comments (0) |

Robert Reich on the dangers of the political economy status quo

Robert B. Reich is University Professor and Maurice B. Hexter Professor of Social and Economic Policy at Brandeis University and at the Brandeis Heller School of Social Policy and Management. He has served in three national administrations, most recently as Secretary of Labor in the Clinton Administration. Daniel Drezner points us to this NY Times op-ed in which Mr. Reich provides a fine analysis of the dangerous economic effects of the seemingly intractable governmental tendencies toward protectionism and pork-barrel spending:

Oil shocks, hurricanes and housing bubbles aside, consumers who are worried about their jobs and wages will be reluctant to buy goods and services, thereby dampening any recovery. But the new insecurity is undermining our national interest in other, less predictable ways by setting off political resistance to economic change, with negative repercussions that ripple beyond the economy.

Forty years ago, free-trade agreements passed Congress with broad backing because legislators recognized that they helped American consumers and promoted global stability. But as job and wage insecurity have grown, public support for free trade has declined. The North American Free Trade Agreement, which passed by 34 votes in 1993, was a hard sale for the Clinton administration. But the recent Central American Free Trade Agreement, embracing a far smaller and less populous area, was an even harder sale for President Bush. Despite Republican control of Congress, the trade deal cleared the House in July by just two votes, and then only after heavy White House pressure.

The increasing insecurity of ordinary workers also imperils our national defense by handcuffing the Pentagon. It can't shift the defense budget to fighting terrorism because of local fears that well-paying jobs will be lost. Contrast this with the comparative ease by which the Pentagon downshifted from fighting World War II to the Cold War, more than 50 years ago. Its recent base-closing recommendations ignited a political firestorm, causing even the apolitical Base Closure and Realignment Commission to retreat. The commission's chairman justified its decision to save the Niagara Falls Air Reserve Station, for example, by noting that the base "is the second-largest employer in western New York."

Consider, finally, the pork that's been larded into the federal budget. Republicans may collectively oppose wasteful spending, but as individual legislators they've created more pork than any Congress in history. The new $286 billion transportation act is bloated with 6,371 "special projects" with a price tag some $30 billion more than the White House wanted. The president reassured the nation that it would, at the least, "give hundreds of thousands of Americans good-paying jobs." The new $12.3 billion energy bill cost twice what the White House sought because it's laden with what Senator Pete Domenici, the New Mexico Republican who ushered it through Congress, defends as measures to create "hundreds of thousands of jobs." According to the conservative watchdog group Citizens Against Government Waste, pork programs have risen from fewer than 2,000 a year in the mid-1990's to almost 14,000 this year.

Read the entire piece, which includes several of Mr. Reich's policy alternatives, such as expansion of the earned income tax credit, which is the modern equivalent of the negative income tax that Milton Friedman introduced in his 1962 classic Capitalism and Freedom to provide welfare in the most efficient manner possible. Moreover, Mr. Reich's view toward the Pentagon's intransigence in continuing to feed sacred cows has been well-chronicled in Robert Coram's book, Boyd: The Fighter Pilot Who Changed the Art of War in which he describes the Pentagon's resistance to Mr. Boyd and his acolytes' efforts in revolutioning the way in which the American military approaches war in the late 20th and early 21st century.

Posted by Tom at 8:15 AM | Comments (0) |

Chief Justice William Rehnquist, R.I.P.

Chief Justice William H. Rehnquist's death Saturday night creates a second vacancy on the Supreme Court and raises the stakes in what will likely be an intense political battle over the Supreme Court's future.

Over the next days and weeks, many Supreme Court commentators more knowledgeable than I will place Chief Justice Rehnquist's judicial career in perspective (four good previous ones are here, here, here and here), so I will pass along the best of those commentaries. However, one thing is clear at this point: Chief Justice Rehnquist will be remembered -- along with John Marshall and Earl Warren -- as one of the Supreme Court's three most influential Chief Justices.

Chief Justice Rehnquist's death comes less than a month before his 81st birthday, only three months after the retirement of Justice Sandra Day O'Connor and just days before hearings on a former clerk of Justice Rehnquist, John Roberts, who President Bush nominated to replace Justice O'Connor. Judge Roberts confirmation hearing is currently scheduled to open Tuesday, but it likely will be delayed as a result of Justice Rehnquist's death.

The Supreme Court will begin its fall term in under a month with senior Associate Justice, John Paul Stevens, in charge of the Chief Justice's administrative duties. The Supreme Court can continue to function with just seven Justices because the law requires only a quorum of six for the Court to take official action. There is an outside chance that the nomination of Judge Roberts would be approved by October 3, the date on which the Court will begin hearing oral arguments in its fall term.

President Bush may elect to promote one of the existing Associate Justices to the Chief Justice position, but that still requires a new nomination and Senate approval (you can bet that takes Justice Clarence Thomas out of the running). Inasmuch as another lightning rod for political controversy -- Justice Antonin Scalia -- would be the only other Associate Justice that President Bush would consider promoting to the Chief Justice position, my sense is that the President will probably not select the new Chief Justice from the existing Associate Justices. Similarly, it is unlikely that the President would decide to change his nomination of Judge Roberts to be for the Chief Justice position because such a move would require an entirely new nomination of Judge Roberts (he was nominated to be an Associate Justice, not Chief Justice).

This post from earlier this year provides background information on several possible candidates to replace Chief Justice Rehnquist, and this more recent post includes information on several candidates who were considered in connection with the vacancy created by Justice O'Connor's retirement. My speculation at the time that President Bush chose Judge Roberts to replace Justice O'Connor was that his selection of Judge Roberts signaled that the President would select a female candidate to replace Chief Justice Rehnquist, which could mean Fifth Circuit Judge and Clear Thinkers favorite, Houstonian Edith H. Jones.

Posted by Tom at 6:13 AM | Comments (1) |

September 3, 2005

A remarkable city responds as Katrina's economic ripples ease a bit

In the chaos of the worst natural disaster of our time, the remarkable Houston community provided extraordinary relief for tens of thousands of New Orleans area evacuees and, in so doing, provided a substantial part of the calming effect that steadied jittery economic markets still attempting to stabilize from the effects of Hurricane Katrina.

First, the economic update. As the evacuation of New Orleans picked up steam on Friday, crude-oil and gasoline futures fell sharply as the federal government and the International Energy Agency arranged to release almost 2 million of barrels of oil daily to cover shortages caused by Hurricane Katrina. The short-term supply relief drove benchmark light, sweet crude oil October futures contracts down nearly $2 to $67.57 a barrel on the Nymex Exchange. Earlier posts on the developing economic effects of Katrina over the past week are here, here, here, here and here.

In addition to the drop in crude futures, Nymex gasoline futures for October fell 22.53 cents to finish at $2.1837 a gallon and the October contracts fell another 23 cents in overnight trading to end at $2.2295 a gallon. Also, Nymex heating oil futures for October traded down 10.74 cents to $2.0911 a gallon.

As noted in this post yesterday, both the Louisiana Offshore Oil Port -- a key Gulf port for oil supertankers -- and the huge Plantation Pipe Line -- which transports fuel to much of the Southeast -- regained power late Thursday and were resuming operations. Moreover, some other fuel pipelines began restarting operations Friday, although supplies of product are way down after the storm knocked out nine Gulf Coast refineries, disrupted gasoline pipelines, and shut down 90% of the oil production and about 80% of natural gas production in the Gulf of Mexico. The Gulf region generates about 30% of U.S. oil production and about 25% of its natural gas production.

On the downside, additional information on damage to offshore oil and gas rigs in the Gulf of Mexico continued to filter in to the markets. The American Petroleum Institute announced that the storm had damaged or displaced about 60 Gulf oil platforms and drilling rigs, and about 30 of those are total losses. A company breakdown on the ownership of the lost rigs and platforms is not yet available. James Hamilton has his usual insightful thoughts on what all this may mean for the overall economy going forward.

Meanwhile, Houston continued to exhibit the remarkable nature that has made this city a comfortable home for my family and me over the past 33 years as city and county officials essentially opened the huge Reliant Park Convention and Sports Complex as massive shelters for an estimated 30,000 evacuees from New Orleans. Officials currently estimate that another 70,000 Gulf Coast area evacuees are staying in the Houston area with relatives or friends, in hotels, or in smaller shelters. The vast majority of these people need financial assistance, and many need medical care. The Houston Chronicle is providing excellent coverage of the situation, as are many Houston-area bloggers, a good number of which are listed in this post of Chronicle business blogger Loren Steffy. BlogHouston.net, the Lone Star Times,Off the Kuff, Eric Berger and many other local blogs have also been providing outstanding coverage of the Houston relief effort.

As bad as this disaster has been, it is difficult to imagine how bad it would have been had Houston's amazing facilities not been available as a transition point for the Gulf Coast region evacuees. Reliant Park is a massive facility that can accomodate huge numbers of people, and it is located near one of the world's finest medical centers, Houston's Texas Medical Center. As large as the loss of life has been in the Gulf Coast region to date, it would have been far larger had Houston's amazing facilities not been available to accomodate the stream of evacuees.

Within Reliant Park, the Astrodome is filled with approximately 15,000 people, while officials have opened up the the adjacent Reliant Arena and the Reliant Park Convention Center to accomodate another 15,000 evacuees. On Friday, city officials also opened the massive George R. Brown Convention Center near downtown Houston, which was filled with air mattresses donated by a local sporting goods retailer. As many as 7,000 people could be staying there as of today.

The flow of buses to Houston continued unabated as conditions in Louisiana have worsened. Rather than turn evacuees away, Houston has simply opened up more of its resources to attempt to accomodate them all, and without much assistance from officials who coordinating the exodus from New Orleans. Texas officials have not been able to coordinate the departures or destinations of the buses with Louisiana counterparts and, at this point, Texas officials have no control over what happens with regard to the exodus from New Orleans.

At this point, Houston officials are using the Astrodome as a staging area for newly arriving buses and their passengers. Medical and security personnel greet each bus after it arrives and pre-screen passengers during the six mile trip to the George R. Brown Convention Center. Meanwhile, Texas Medical Center hospitals equipped and staffed a medical clinic at the Brown Center to handle the larger number of elderly and ill arrivals, and a group of Houston churches are organizing to raise about $4 million for a month's worth of meals and to provide training for volunteer servers at Reliant Park and the Brown Center.

Folks, this is going to be one wild ride. Stay tuned.

Posted by Tom at 7:02 AM | Comments (3) |

Fifth Circuit relocates to Houston

Following on this previous post about the Fifth Circuit Court of Appeals emergency operations, Chief Judge Carolyn Dineen King announced on Friday that the Court would temporarily relocate to Houston. The court will resume operations in Houston in the Federal Courthouse at 515 Rusk Avenue in downtown Houston (View image) on September 14, and the current plan is to remain here for at least two months before eventually moving to temporarly quarters in Baton Rouge, La. Given the situation in New Orleans, the timing of a return to the Court's permanent offices there is problematic at this point.

Most of the Fifth Circuit's documents are digitized and backed up electronically on remote servers, so the Court's operations should be able to get back up to speed quickly. Most of the Court's paper documents were moved from the first floor to the second floor of its New Orleans courthouse before the storm, but the status of those files is still undetermined at this time.

Posted by Tom at 4:51 AM | Comments (0) |

September 2, 2005

Grilled by Koppel

Late night television viewers are still shaking their heads over ABC Nightline's Ted Koppel's interview last night of Mike Brown, embattled director of the Federal Emergency Management Agency (FEMA). Here is a partial transcript of the interview, a portion of which went like this:

Koppel: You have chaos and anarchy breaking out in a number of different places in New Orleans, it would seem the first thing is to get good solid combat troops like the 82nd airborne or 101st in there. These are guys who are ready to move immediately. Instead you send National Guardsmen and it's taking time. You don't have time.

Brown: [T]here will soon be 30,000 armed National Guard troops in there to restore order, to take control of the facilities and allow us to do our job.

Koppel: Mr. Brown, you know, forgive me . . . But here we are, essentially five days after the storm hit, and you are talking about what's going to happen in the next couple of days.

It didn't get any better for Mr. Brown. Read the entire piece here.

Update: Stephen Bainbridge is asking the same question as Mr. Koppel.

Posted by Tom at 3:37 PM | Comments (0) |

A hero in New Orleans

My sense is that this is not the time to be blathering about who to blame for what has happened in New Orleans and the governmental response to it. The logistical complications alone of obtaining and organizing the resources necessary to evacuate hundreds of thousands of people under flooded and destroyed conditions are not understood by many of the folks who are criticizing those who are attempting to coordinate that task. So, I prefer to focus on that effort and the heroes who are arising amid the squalor.

One of those is Dr. Steve Phillip, who wrote the following email this past Tuesday afternoon from downtown New Orleans:

Thanks to all of you who have sent your notes of concern and your prayers. I am writing this note on Tuesday at 2 p.m. I wanted to update all of you as to the situation here. I don't know how much information you are getting but I am certain it is more than we are getting. Be advised that almost everything I am telling you is from direct observation or rumor from reasonable sources. They are allowing limited internet access, so I hope to send this dispatch today.

Personally, my family and I are fine. My family is safe in Jackson, Miss., and I am now a temporary resident of the Ritz Carlton Hotel in New Orleans. I figured if it was my time to go, I wanted to go in a place with a good wine list. In addition, this hotel is in a very old building on Canal Street that could and did sustain little damage. Many of the other hotels sustained significant loss of windows, and we expect that many of the guests may be evacuated here.

Things were obviously bad yesterday, but they are much worse today. Overnight the water arrived. Now Canal Street (true to its origins) is indeed a canal. The first floor of all downtown buildings is underwater. I have heard that Charity Hospital and Tulane are limited in their ability to care for patients because of water. Ochsner is the only hospital that remains fully functional. However, I spoke with them today and they too are on generator and losing food and water fast.

The city now has no clean water, no sewerage system, no electricity, and no real communications. Bodies are still being recovered floating in the floods. We are worried about a cholera epidemic. Even the police are without effective communications. We have a group of armed police here with us at the hotel that is admirably trying to exert some local law enforcement. This is tough because looting is now rampant. Most of it is not malicious looting. These are poor and desperate people with no housing and no medical care and no food or water trying to take care of themselves and their families. Unfortunately, the people are armed and dangerous. We hear gunshots frequently. Most of Canal Street is occupied by armed looters who have a low threshold for discharging their weapons. We hear gunshots frequently. The looters are using makeshift boats made of pieces of Styrofoam to access. We are still waiting for a significant National Guard presence.

The health care situation here has dramatically worsened overnight. Many people in the hotel are elderly and small children. Many other guests have unusual diseases. .... There are (Infectious Disease) physicians in at this hotel attending an HIV confection. We have commandeered the world famous French Quarter Bar to turn into a makeshift clinic. There is a team of about seven doctors and PAs and pharmacists. We anticipate that this will be the major medical facility in the central business district and French Quarter.

Our biggest adventure today was raiding the Walgreen's on Canal under police escort. The pharmacy was dark and full of water. We basically scooped the entire drug sets into garbage bags and removed them. All under police escort. The looters had to be held back at gunpoint. After a dose of prophylactic Cipro I hope to be fine.

In all we are faring well. We have set up a hospital in the French Quarter bar in the hotel, and will start admitting patients today. Many will be from the hotel, but many will not. We are anticipating dealing with multiple medical problems, medications and acute injuries. Infection and perhaps even cholera are anticipated major problems. Food and water shortages are imminent.

The biggest question to all of us is "where is the National Guard?" We hear jet fighters and helicopters, but no real armed presence, and hence the rampant looting. There is no Red Cross and no Salvation Army.

In a sort of cliché way, this is an edifying experience. One is rapidly focused away from the transient and material to the bare necessities of life. It has been challenging to me to learn how to be a primary care physician. We are under martial law so return to our homes is impossible. I don't know how long it will be and this is my greatest fear. Despite it all, this is a soul-edifying experience. The greatest pain is to think about the loss. And how long the rebuild will take? And the horror of so many dead people ..

PLEASE SEND THIS DISPATCH TO ALL YOU THING MAY BE INTERESTED IN A DISPATCH from the front. I will send more according to your interest. Hopefully their collective prayers will be answered. By the way, suture packs, sterile gloves and stethoscopes will be needed as the Ritz turns into a MASH.

Steve Philip

Posted by Tom at 12:45 PM | Comments (1) |

Katrina's economic ripples

As state and federal officials grappled with the massive human toll that Hurricane Katrina exacted on the Gulf Coast region, further assessment of the damage is indicating that the storm has wreaked havoc to key business properties along the Gulf Coast.

In positive developments, crude-oil prices eased early Friday morning in electronic trading and gasoline futures fell for the first time this week as several energy facilities on the Gulf Coast started up again for the first time. The front-month October contract on the Nymex Exchange fell 42 cents to $69.05 a barrel after rising 53 cents during trading on Thursday. However, crude oil contracts for November through February -- traditionally high-demand months because of heating oil demand -- were all trading above $70 a barrel amid worries that the storm had wiped out key refining capacity.

Eight major Gulf Coast refineries are still shut down and it is becoming increasingly apparent that at least several of those will require a month or more to restart. Moreover, early speculation is that there has also been significant damage to offshore infrastructure -- i.e., pipelines, gathering hubs and production platforms -- that could take several months to repair. Less than 20% of energy production within the Gulf of Mexico -- which produces about a quarter of U.S. production -- had been restored yesterday. In comparison, four days after the less powerful Hurricane Ivan storm last year, 60% of such production had been restarted.

Still, some good news was trickling in. Valero Energy Corp. announced that it had restored power to its refinery in St. Charles, La. and Marathon Oil Co. announced that its refinery in Garyville could be producing gasoline by next week. In addition, Houston-based Kinder Morgan Energy Partners LP announced that its Plantation Pipe Line Co. had resumed service at about 25% of capacity on Wednesday.

Whether a true energy crisis emerges from this natural disaster depends on how quickly the production and refining infrastructure in the Gulf Coast region is repaired, how well the oil and gas industry handles re-distribution of products to the various U.S. regions in the interim and whether there is a "run on the pumps" by the public as a result of a perceived shortage of fuel. Last year, Hurricane Ivan damaged key offshore pipeline infrastructure, which dampened production for several months and eventually was a key factor in an increase in crude oil from $44 to above $50 over a two month period.

What makes this energy crunch different from past ones is that it has been caused by damage to entire region's integrated supply system. Unlike the energy crises of the 1970s or the run-up after Iraq's invasion of Kuwait in 1990-91 that were based on constrained oil production, this situation involves natural gas, refineries and electricity. As Daniel Yergin points out today in the Wall Street Journal ($), the oil production that has been shut-in to date is far less than the markets lost when Iraq invaded Kuwait in 1990:

However, 16% of U.S. natural gas has been shut-in and 10% of U.S. refining capacity is under water at a time when there is no slack at all in the world's refining system. The electric and natural gas distribution system in the region has also been knocked out. All of this has a knock-on effect: Boats can't get out to the platforms without diesel fuel; and refineries can't operate without electricity or people. . . . With communications broken down, companies are still trying to make contact with the missing employees who run the different parts of the energy infrastructure. As for electricity, a frontline manager summed up the problem: "You can't overemphasize the absolute enormity of the undertaking to put this place back together again."

Meanwhile, concerns are also increasing about damage to the critical Mississippi River shipping corridor south of New Orleans that allows deep-water ships to access the Port of New Orleans. Photographs and first-hand accounts from helicopter pilots, boat captains and engineers indicate that the main channel of the river remains intact, but that the surrounding nub of land around the last 20 miles of the river -- knowns as the "Crow's Foot" -- was heavily damaged with about 100 barges and other vessels sunk or grounded in the river. The long-term navigability of the lower Mississippi and its main entryway for large ocean-going vessels -- the 45 foot deep channel known as the "Southwest Pass" -- is still undetermined and probably will not be known for at least several more days. And if things needed to get any more complicated than they already are, the media is reporting that a major oil spill near Venice at the southern tip of Louisiana near the mouth of the Mississippi River is a "potential environmental hazard."

The Southwest Pass is extremely important to the economy of the region and other parts of the U.S. because it is the conduit for thousands of large ships that bring goods into the vast complex of docks, shipping terminals, grain-loading facilities and petroleum-processing plants that line the banks of the Mississippi between New Orleans and Baton Rouge. This massive shipping area is one of the busiest in the U.S. and coordinates the flow of much imported petroleum, export grain and huge amounts of other types of cargo such as from coal, rubber, steel, and chemicals.

Inasmuch as about 60% of U.S. grain exports go through New Orleans, wheat futures for September delivery have fallen almost 2% this week at the Chicago Board of Trade. Similarly, New Orleans is a main port for coffee imports, so coffee futures for December delivery have jumped nearly 10%. The loss of coffee imports sitting in the New Orleans port warehouses at the time of the storm could be the equivalent of a major frost in South American coffee-producing regions.

Finally, given the other emergencies, almost no analysis has been performed to date on the impact of the storm on the Gulf Coast region's small businesses, which, in the aggregate, are the largest employer in the region. Virtually all of those businesses have been wiped out. Given the large exodus of people from the area resulting from the uninhabitable conditions, most of those businesses -- most of which are service-oriented -- will not be revived. Thus, those jobs simply will not be available for residents of the area for quite some time, adding another formidable obstacle to rebuilding the devastated Gulf Coast region.

Posted by Tom at 5:40 AM | Comments (0) |

Judge examining Lay-Skilling witness tampering charges

Following on this post from earlier this summer, U.S. District Judge Sim Lake gave his strongest indication to date that he is prepared to take action against the Enron Task Force's strategy to deny former Enron chairman Ken Lay, former CEO Jeff Skilling and former chief accountant Richard Causey as many defense witnesses as possible in their upcoming corporate and securities fraud trial.

After attorneys for Messrs. Lay and Skilling filed another motion under seal with Judge Lake alleging prosecutorial misconduct in the Task Force threatening potential defense witnesses, Judge Lake on Thursday ordered another hearing next week after stating on the record that he believed the defense assertions that many witnesses had at least a perceived threat from the Task Force. Although careful to state that he had not yet concluded that prosecutorial misconduct had taken place, Judge Lake directed defense lawyers to provide to the Task Force a list of witnesses who have declined to talk to the Lay-Skilling defense team. The Task Force has named 114 unindicted co-conspirators in its legacy case against Messrs. Lay, Skilling and Causey, which is a far larger number of co-conspirators than has ever been alleged in any other federal white collar criminal case.

At next week's hearing, Judge Lake indicated that he expected the parties come up with reasonable procedures to give defense lawyers "a better right of access to these people" even if it required bringing the witnesses to his courtroom to meet with the defense so that he could assure them that he will not allow the Task Force to retaliate against them for talking to the defense team. Judge Lake indicated that he would even make rooms available in the federal courthouse for the defense to interview the witnesses.

Although the latest Lay-Skilling motion remains under seal and is not available for public review, the motion appears to be addressing two dubious tactics of the Task Force during its investigation of Enron-related matters -- i.e., threatening potential defense witnesses with indictment if they testify in favor of Enron-related defendants and bludgeoning former Enron employees to enter into plea arrangements under which they would provide favorable but false testimony in prosecutions of other Enron-related defendants. To make matters even more complicated, Judge Lake's harsh sentence handed down in the sad case of Jamie Olis last year has had the understandable effect of increasing witnesses' concerns over the impact of the Task Force carrying through on its threats to indict.

Those tactics have come to light recently as a result of revelations in other Enron-related criminal cases. First, several key defense witnesses in the Nigerian Barge case declined to testify on Fifth Amendment grounds because the Task Force had fingered them as targets of the Enron criminal investigation. Then, as noted in this earlier post, former Enron Broadband engineer Lawrence Ciscon dramatically testified during the Enron Broadband trial that Enron Task Force prosecutors had repeatedly threatened him and had fingered him as a target of an indictment in attempting to dissuade him from testifying on behalf of the five Enron Broadband defendants. That dramatic testimony came on the heels of the Task Force eliciting false testimony from former Enron Broadband co-CEO Ken Rice during that trial, which was then followed by the Task Force threatening another witness in connection with her testimony regarding Rice's false testimony.

As noted in this post, the Enron Task Force's public relations campaign in regard to its Enron-related prosecutions has been quite effective. However, in actually proving its allegations in court, the Task Force has been far less successful. Now, after painting Messrs. Lay and Skilling as pariahs in the court of public opinion, the Task Force prosecutors do not believe that they can prevail in the true prosecution of these men without attempting to prevent the defense from questioning key prosecution witnesses under oath and threatening potential defense witnesses. Last week, in another case involving governmental misconduct, U.S. District Judge Lynn Hughes observed the following:

"[The government's action was] a perverse combination of personal and political hostility. The personal part was political, too, since it was derived from the bureaucrats' and their like-thinking co-conspirators' appreciation of a successful entrepreneur as the personification of what they opposed in America."

Similarly, the conduct of the Enron Task Force is a stark reminder of how unconstrained prosecutors lacking prosecutorial discretion can ruin businesses, reputations and lives. Thus, as noted earlier, the Justice Department is not about "justice" at all, but about fulfilling pre-conceived political notions of alleged wrongdoing regardless of whether those notions comport with the truth. Is this really the way that we want our criminal justice system administered?

Posted by Tom at 4:43 AM | Comments (1) |

September 1, 2005

Resources for Houston's Hurricane Katrina relief effort

Be sure to check out blogHouston.net where Anne Linehan and Kevin Whited are doing an excellent job of chronicling the local resources in support of Houston's extraordinary Hurricane Katrina relief effort. Anne and Kevin have several posts relating to the relief effort, and they will be adding additional ones over the next several days. Check out their site periodically for updates. A great organization job by two of Houston's best bloggers.

Update: Local blog The Lone Star Times is liveblogging from the Astrodome, providing a fascinating resource for keeping up with the unfolding developments within the largest refugee camp to be established on U.S. soil in many, many years. The Chronicle has also started up the Domeblog that is providing periodic updates from the Astrodome.

Posted by Tom at 5:21 PM | Comments (2) |

Where is the Road Warrior?

The following description of downtown New Orleans was posted about an hour ago from the Interdictor blog, the author of which is securing a building in downtown New Orleans. The description sounds as if it is coming straight out of a scene from The Road Warrior:

"Situation is critical.

I'm not leaving, so stop asking. I'm staying. I am staying until this shitstorm has blown itself out. Period. End of discussion.

Now for some updates:

1. Been too busy to debrief the police officer, so that will come later. Low priority now.

2. Buses loading people up on Camp Street to take refugees to Dallas, or so the word on the street (literally) is.

3. Dead bodies everywhere: convention center, down camp street, all over.

4. National Guard shoving water off the backs of trucks. They're just pushing it off without stopping, people don't even know it's there at first -- they drop it on the side in debris, there's no sign or distribution point -- people are scared to go near it at first, because the drop points are guarded by troops or federal agents with assault rifles who don't let people come near them, which scares people off. It is a mess. When people actually get to the water, they are in such a rush to get it that one family left their small child behind and forget about him until Sig carried him back to the family.

It's raining now and I guess that's a relief from the heat. It's hot as hell down there in the sun. Crime is absolutely rampant: rapes, murders, rape-murder combinations.

I have really cut back answering IMs. Not enough time. I apologize people.

In case anyone in national security is reading this, get the word to President Bush that we need the military in here NOW. The Active Duty Armed Forces. Mr. President, we are losing this city. I don't care what you're hearing on the news. The city is being lost. It is the law of the jungle down here. The command and control structure here is barely functioning. I'm not sure it's anyone's fault -- I'm not sure it could be any other way at this point. We need the kind of logistical support and infrastructure only the Active Duty military can provide. The hospitals are in dire straights. The police barely have any capabilities at this point. The National Guard is doing their best, but the situation is not being contained. I'm here to help in anyway I can, but my capabilities are limited and dropping. Please get the military here to maintain order before this city is lost.

Doing what we can, this is Outpost Crystal getting back to work."

In another development, CNN is reporting that the town of Waveland, Mississippi -- a town of 7,000 thirty-five miles east of New Orleans -- has been destroyed completely. The CNN story includes a grim video that indicates that there was a huge -- but still undetermined at this point -- loss of life in Waveland during the storm.

Update: The Chronicle's Eric Berger passes along this daunting description of the conditions in New Orleans from Dr. Richard Bradley, a professor at both the University of Texas Houston Medical School and Baylor College of Medicine, who is assigned to the elite Texas Task Force One Urban Search and Rescue team that was deployed to the News Orleans disaster area on the evening of Saturday, Aug. 27, a day before the hurricane hit the area.

Posted by Tom at 1:14 PM | Comments (1) |

Fifth Circuit emergency operations

Several friends and fellow bloggers have asked over the past several days how the New Orleans-based Fifth Circuit Court of Appeals (website currently down) is dealing with the destruction that has resulted from Hurricane Katrina, so I made a couple of calls yesterday to determine the Court's status and pass along the following information.

The Court will probably relocate on a temporary basis to Houston, where two of the Court's most prominent members -- Chief Judge Carolyn Dineen King and Edith H. Jones -- make their homes and maintain offices. Thankfully, of the Court's 15 judges, only three of them live in New Orleans -- Jacques Wiener, James Dennis and Edith Brown Clement -- and each of them has been relocated and are safe.

For now, Judge King's office in Houston is serving as the court's unofficial clerk's office and is coordinating emergency matters in pending cases, such as death penalty stays. The Court has not yet determined when it will resume regular operations, so filing deadlines have been extended and appellate attorneys are instructed not to send any filings to the New Orleans courthouse. Further instructions regarding emergency Court matters can be found here for the time being, and then at the Fifth Circuit's website when it is back up and running, which is expected soon.

The Fifth Circuit has had in place contingency plans for a Katrina-type disaster for some time, so the Court is currently proceeding according to that plan. As the storm approached New Orleans over this past weekend, court staff started moving some files from the first floor to the second floor in anticipation of flooding. On Saturday, the court cancelled its oral argument schedule for this week and ordered staff to evacuate the city. Most of the Court's recent documents are digitized and stored on computer, which are backed up daily and stored on servers located in Baton Rouge and Shreveport, so the Court's current cases should not be adversely affected to any large degree.

I will post periodic updates on the Fifth Circuit's operations as more information becomes available over the next several days.

Posted by Tom at 6:12 AM | Comments (1) |

Houston takes in New Orleans' weary

As the effects of the worst natural disaster of our time continued to become more apparent with each passing hour, Houston opened its arms to tens of thousands of New Orleans citizens who lost virtually everything but their lives.

Houston's venerable Astrodome -- the subject of a local debate over what to do with aging landmark -- was prepared yesterday to receive as many as 25,000 evacuees from New Orleans, many of whom have spent the past five days inside the deteriorating Louisiana Superdome in downtown New Orleans. The evacuees are expected to begin heading for Houston this morning in a caravan of almost 500 buses provided by the Federal Emergency Management Agency. As if to underscore the desperation of the situation, two of the three first buses to reach the Astrodome from New Orleans early this morning were "renegade" buses that did not contain evacuees from the Superdome. The Astrodome went ahead and took in the evacuees from all the buses, anyway. This earlier post provides links to blogs that provide up-to-the minute updates on the situation in New Orleans and the Gulf Coast.

Unfortunately, the chaos in New Orleans has delayed the evacuation of the Superdome on Thursday morning. The Associated Press is reporting the following as of 7:15 a.m.:

The evacuation of the Superdome was suspended Thursday after shots were fired at a military helicopter, an ambulance official overseeing the operation said. No immediate injuries were reported.

"We have suspended operations until they gain control of the Superdome," said Richard Zeuschlag, head of Acadian Ambulance, which was handling the evacuation of sick and injured people from the Superdome.

He said that military would not fly out of the Superdome either because of the gunfire and that the National Guard told him that it was sending 100 military police officers to gain control.

"That's not enough," Zeuschlag. "We need a thousand."

In the meantime, the Astrodome continues to be equipped with 30,000 cots and blankets and outfitted with a medical clinic and food service dispensing three meals a day. The Red Cross and City officials announced that they expect to provide temporary shelter for at least a month at the Astrodome, then begin moving Louisiana residents to shelters closer to their homes. Meanwhile, Houston Mayor Bill White and County Judge Robert Eckels huddled with representatives of Houston area apartment owners to determine how many of Houston's currently large surplus of vacant apartment units could be mobolized to house some of the evacuees. On Wednesday evening, Mayor White did an excellent job representing Houston on CNN, and Judge Eckels on Fox News also conveyed a sense of competent and no-nonsense leadership in the wake of the daunting logistics of preparing for the influx of evacuees.

Elsewhere, evacuees streamed into the dozen local Red Cross shelters that have been set up to receive evacuees from the Gulf Coast disaster area. You can donate through Amazon to the Gulf Coast relief effort through this link, which has also been added to the right column of this blog. Also, Glenn Reynolds has compiled this handy list of direct links to various charities participating in the relief effort. Finally, Kevin Whited over at blogHouston.net provides this list of links to local Houston charities assisting in the relief effort.

In another development, Houston will also open its schools to all displaced Louisiana children. Mayor White stated that "we need to do some planning and thinking on what we do with people out of their houses for a very extended period of time. We have a plan for what we will do for 14 weeks. After that it is unclear." Other Texas cities are also pitching in on the relief effort. The first Hurricane Katrina refugees arrived Wednesday afternoon at the newly opened Reunion Arena in Dallas, and the Red Cross in Dallas had opened two smaller shelters to house about 400 people.

As all of this was going on locally, national and international markets continue to grapple with the potential long-term economic effects of this natural disaster. Although devastating hurricanes such as Andrew in 1992 and the 1994 Los Angeles Northridge earthquake have had a temporary impact on the huge U.S. economy, Katrina could be different. The large scale destruction of several Gulf Coast cities -- including one of almost a half million residents -- is not something that the United States has had to face since the early part of the 20th century. This NY Times schematic provides an excellent guide to the destruction in the New Orleans area.

On a related note, this Wall Street Journal ($) op-ed by urban expert Joel Kotkin points out that the character of New Orleans had changed even before Hurricane Katrina, and that the damage from the storm may be the impetus for either good or bad with regard to the city's future:

In 1920, New Orleans' population was nearly three times that of Houston and nine times Miami's. It was the primary southern destination for European and Caribbean immigrants. Now, both the Houston and Miami areas -- despite their own ample experience with disasters of the natural as well as the manmade variety -- have long ago surpassed New Orleans, with populations more than three times larger. During the '90s, the Miami and Houston areas grew almost six times faster than greater New Orleans, and flourished as major destinations for immigrants, particularly from Latin America.

These newcomers have helped transform Miami and Houston into primary centers for trade, investment and services, from finance and accounting to medical care, for the entire Caribbean basin. They have started businesses, staffed factories, and become players in civic life. Houston has taken over completely as the dominant center for the energy industry, once a key high-wage employer in the New Orleans region.

Instead of serving as a major commercial and entrepreneurial center, New Orleans' dominant industry lies not in creating its future but selling its past, much of which now sits underwater. Tourism defines contemporary New Orleans' economy more than its still-large port, or its remaining industry, or its energy production. Although there is nothing wrong, per se, in being a tourist town, it is not an industry that attracts high-wage jobs; and tends to create a highly bifurcated social structure. This can be seen in New Orleans' perennially high rates of underemployment, crime and poverty. The murder rate is 10 times the national average.

Tyler Cowen over at Martinal Revolution has further thoughts on New Orleans' ability to rebound from this disaster, and this Washington Post article provides a good summary of the practical obstacles that confront New Orleans' recovery.

As noted in these earlier posts, Katrina has already interfered with production of oil and natural gas in the Gulf of Mexico and oil refining along the coast, resulting in rapidly increasing oil and gasoline prices. In addition, the storm has shut down important ports that carry oil, grain and other goods in and out of the U.S. In comparison, even though Hurricane Andrew was an extremely destructive storm, it really had a rather negligible effect on America's economy. The different with Katrina is that it has potentially damaged the ports and refinery system for a large segment of America.

Unfortunately, many of the key economic questions remain unanswerable as the aftermath of Katrina continues to be assessed. The damage to the refineries in the New Orleans area is still being evaluated, so it is still unclear how long it will take to get those plants back on line. Although much of the cargo originally destined for the port of New Orleans has been diverted to the Port of Houston, it remains unclear how that diversion will impact the timing of the distribution of such cargo to the Gulf Coast region.

Financial columnist David Wessel of the Wall Street Journal ($) analyzed the short-term economic cases in the following manner:

The best-case scenario, . . . is that oil, natural gas and gasoline supply are cut by only about 5% for several weeks. Oil prices rise to $75 a barrel, and then slip back to the low $60s. Gasoline prices go above $3 for a couple months and then fall back to $2.50 by year's end. That would shave economic growth by between half a percentage point and one full point later this year.

The worst case is that energy supply is reduced twice as much, and oil prices soar to $100 before sliding back to $70 by year's end and gasoline prices average -- ouch! -- between $3 and $3.50 a gallon for four to six months. That would cut GDP growth by as much as three percentage points, and bring the economy dangerously close to recession by year's end.

Benchmark crude-oil futures on the Nymex Exchange traded at more than $70 a barrel intraday on Wednesday before closing at $68.94, down 87 cents from Tuesday. On futures markets, the gasoline price jumped 17.55 cents to $2.65 a gallon on Wednesday, and since retail prices tend to be about 65 cents higher than wholesale, many experts are now predicting that the U.S. will be dealing with $3-plus-a-gallon gasoline for the next several months (James Hamilton has further thoughts on the potential shortage of gasoline). Meanwhile, heating oil for September delivery fell 2.29 cents to settle at $2.053 in Nymex trading yesterday, while natural gas for October delivery was down 18.7 cents at $11.472 per million British thermal units. Nevertheless, heating oil is up 12% over the last three days and natural gas has risen 17% over the same period.

Reflecting the disruption in supply distribution resulting from Katrina, the Petroleum Traders Corp. of Indiana -- one of the largest independent U.S. distributors of wholesale gasoline -- announced that BP PLC had been forced to cut off gasoline supplies, while earlier in the day, majors Exxon Mobil Corp. and Royal Dutch Shell PLC cautioned that there could be supply disruptions over the next several weeks.

Meanwhile, trading in public companies with a large Gulf Coast presence relected the uncertainty of the situation. Put buyers were active yesterday in regard to credit-card issuer Capital One Financial Corp. over speculation that Hurricane Katrina could delay the closing of the company's purchase of New Orleans-based Hibernia Corp. In unfortunate timing, that transaction is scheduled to close today. Hibernia stock fell $1.97 yesterday (5.8%) to $31.75 on the New York Stock Exchange.

Large hospital chains with operations in the New Orleans area are also feeling the uncertainty of the markets. Option traders were active yesterday in the short-term options on LifePoint Hospitals Inc., which owns the River Parishes Hospital near Lake Pontchartrain, although LifePoint stock rose 65 cents to $45.48 in active trading volume at the Nasdaq Stock Market. Similarly, puts on Ameristar Casinos Inc., which has several Gulf Coast casinos, were also active in tradiny yesterday, although the stock price was off by only 39 cents to $22.97 on the Nasdaq exchange.

Finally, this Wall Street Journal ($) article compares the Hurricane Katrina disaster to the past U.S. disasters of the great 1871 Chicago fire, the 1906 San Francisco earthquake, the 1900 Galveston hurricane, and the 1889 Johnstown flood. Perhaps the most telling observation about this disaster that can be made at this point is that one thing is clear -- regardless of whether it is worse than any of those earlier disasters, it is definitely in the same class of magnitude.

Posted by Tom at 4:17 AM | Comments (0) |

August 31, 2005

DeGabrielle is the choice for U.S. Attorney

First Assistant U.S. Attorney Don DeGabrielle -- the favored candidate of most of Houston's criminal defense bar -- was recommended to President Bush today by Texas Senators Kay Bailey Hutchison and John Cornyn to become the next U.S. Attorney for the Southern District of Texas. Mr. DeGabrielle will replace his former boss, Michael Shelby, who resigned in June to join Houston-based Fulbright & Jaworski's white collar crime section.Chuck Rosenberg, a former chief of staff to U.S. Deputy Attorney General James Comey, has been the interim U.S. Attorney since Mr. Shelby's resignation.

Inasmuch as Mr. DeGabrielle has been with the local U.S. Attorney's office since 1986, he is well-known to the local criminal defense bar that has become somewhat frustrated with the revolving door nature of the U.S. Attorney's job in Houston over the past decade. Given the misconduct of the Enron Task Force in a number of high-profile Enron-related criminal cases over the past year, a huge sigh of relief could be heard from Houston's criminal defense bar when Mr. DeGabrielle was recommended instead of one of the prosecutors off of the Task Force, at least one of whom was known to have applied for the position. Mr. DeGabrielle and the rest of the local U.S. Attorney's office recused themselves at the outset of the criminal investigation into Enron, which led to the creation of the Enron Task Force in the first place.

Meanwhile, Senators Hutchison and Cornyn also recommended to President Bush that Fulbright & Jaworski partner and well-known local maritime lawyer Gray Miller replace U.S. District Judge Ewing Werlein Jr., who is scheduled to take senior status at the end of this year.

Posted by Tom at 5:17 PM | Comments (0) |

AG intervenes in Baylor-Methodist squabble

The Chronicle's Todd Ackerman continues his fine reporting on the saga of the Medical Center divorce between The Methodist Hospital and Baylor College of Medicine with this report that Texas Attorney General Greg Abbott has engaged the feuding ex-partners in a series of meetings over the past two weeks for the purpose of ending the bickering between the institutions, which has been going on for the better part of two years now.

In the meantime, Mr. Ackerman reports that, even as the talks took place, eleven Baylor cardiologists left for Methodist, bringing to 80 the total number of physician and faculty defections that Baylor has suffered since the split in April, 2004. Previously, Baylor departments of pathology, neurology/neurosurgery, plastic surgery, anesthesiology and orthopedics suffered physician or faculty losses to Methodist.

A former Houstonian, Mr. Abbott clearly is taking a special interest in resolving the Baylor-Methodist feud that has shaken Houston's Texas Medical Center. Mr. Abbott was a young attorney in private practice in Houston during the early 1980's when he was paralyzed from the waist down after being seriously injured by a falling tree branch while jogging at Houston's Memorial Park. Mr. Abbott was treated at Medical Center hospitals, and he has often publicly expressed his appreciation for the extraordinary treatment that he received there, particularly his rehabilitation stint at The Institute for Rehabilitation and Research (known as "TIRR"). As such, he is a powerful voice for the public interest in mediating the Baylor-Methodist dispute.

Posted by Tom at 6:25 AM | Comments (0) |

The David Boies Copy Club

Let's see if we can keep this all straight.

David Boies -- who champions himself as an advocate of honest corporate governance -- was Tyco's outside counsel in connection with investigating corporate fraud by Tyco management, and one of the prosecution's main witnesses in the corporate fraud trial against former Tyco executives Dennis Kozlowski and Mark Swartz.

On the other hand, Mr. Boies is one of the members of Maurice "Hank" Greenberg's defense team in connection with defending Mr. Greenberg from Eliot Spitzer's allegations that Mr. Greenberg perpetrated fraud at AIG.

In the meantime, Mr. Boies just resigned as special counsel for Adelphia for violating the Bankruptcy Code and Rules by failing to disclose to the Adelphia Bankruptcy Court that members of his family indirectly own a substantial interest in a document management services company that did between $5 and $10 million of business with Adelphia. Apparently, other clients of Mr. Boies' firm also have paid substantial sums to the document management company without knowing of the affiliation to Mr. Boies' family members.

This Wall Street Journal ($) article has more, as does Larry Ribstein.

Posted by Tom at 5:56 AM | Comments (2) |

Further assessment of Katrina's economic impact

As companies involved in the U.S. oil and gas industry continue to assess the damage that Hurricane Katrina has caused to Gulf of Mexico and Gulf Coast production facilities, Royal Dutch Shell PLC announced on Tuesday that its Mars floating production platform, which generates about 220,000 barrels of oil and 220 million cubic feet of natural gas daily, has sustained significant damage, as reflected by the picture on the left. It appears that the platform's above-water module has overturned as a result of the storm. Here are the previous posts over the past several days on Hurricane Katrina.

Meanwhile, initial damage assessments from the hurricane sent oil and gasoline futures prices sharply higher as the storm appears to have knocked out about 10% of U.S. refining capacity for what could be an extended period of time. Katrina has flooded the areas around several major refineries and possibly the refineries themselves, so even when crude-oil production in the Gulf of Mexico is restored, converting that oil into gasoline and other products requires refineries that may not be online for quite some time. Eight major U.S. refineries in the Gulf Coast that produce gasoline, heating oil and other products for distribution across the Southeast and the East Coast remain closed as damage assessments continue.

In anticipation of the storm, producers in the Gulf shut down wells that produce 1.4 million barrels a day. To put that in perspective, that level of production is comparable to the excess pumping capacity of OPEC. However, most of OPEC's excess capacity is in Saudi Arabia, so it takes over a month to import that oil and many U.S. refineries cannot process the high-sulfer Saudi crude oil. Consequently, increased Middle East oil production is not a quick fix to the current shortages being caused by the damage from Katrina.

The wholesale price of gasoline increased by almost $0.42 a gallon yesterday and retail prices went over $2.80 a gallon in Chicago. October crude-oil futures settled up $2.61 for the day at a new nominal record of $69.81 a barrel in trading on the New York Mercantile Exchange. Although frenetic buying ahead of big storms is normal in commodity markets, it is almost unheard of for the after-storm response to be even worse, which is a signal that the markets are betting that the recovery from the storm will take months. Indeed, the next five monthly contracts all closed at successively higher prices (called a "contango" in the trading business), with the last three all higher than $70 and futures for March, 2006 delivery closing at $70.11 a barrel. At very least, in view of the 55 cent per gallon rise in the price of September gasoline futures, my sense is that it is safe to say that we are all in for a huge shock at the gasoline pump over the next several weeks.

The status of most of the New Orleans-area refineries remains largely unknown. For example, Murphy Oil Corp.'s Meraux, La., refinery, which is located 10 miles southeast of New Orleans, is in an area with substantial flooding. Similarly, Chevron has been unable to reach its huge refinery in Pascagoula, Miss. and Exxon Mobil Corp. has not been able to get into its refinery in Chalmette, La., yet. On the other hand, Valero Energy Corp. announced that two key units of its St. Charles refinery were under three feet of water and that widespread electrical damage had occurred. The company estimated that it would take two weeks to re-start the refinery even after power is restored. Thankfully, the Louisiana Offshore Oil Port ("the Loop")-- the key Gulf Coast importation facility for tankers arriving from foreign producers of oil -- did not incur any catastrophic damage.

Clear Thinkers favorite James Hamilton has these further thoughts on the probable economic effects of Katrina. And this Wall Street Journal ($) article provides an excellent analysis of the New Orleans levee system and what needs to occur for the flooding in New Orleans to recede. Finally, Houston blogger Banjo Jones has a creative idea on how Houston can chip in to help the homeless of New Orleans.

Posted by Tom at 4:19 AM | Comments (0) |

August 30, 2005

Situation in New Orleans deteriorating

The already dire situation in New Orleans has taken a turn for the worse this morning as the breach in the 17th Street Canal Levee is now 200 feet wide and slowly flooding the entire city. In short, the worst-case scenario may be occurring as flood waters completely fill the below sea-level bowl that is New Orleans, potentially turning Lake Pontchartrain and the city into one big toxic lake.

For those of you who cannot monitor developments via television, Brendan Loy has been doing an incredible job of blogging developments as they occur, so check on his site frequently for updates. Also, WWLTV in New Orleans has established this blog that provides continual updates on developments in the city. Finally, the Interdictor is also providing up-to-date eyewitness accounts of developments in New Orleans.

In addition, the Chronicle's Eric Berger has been doing an outstanding job of analyzing Hurricane Katrina developments on a more thorough basis on his SciGuy blog. The Chronicle's Loren Steffy has also been doing a fine job of keeping up with the financial implications of the hurricane over at his Full Disclosure blog. Finally, here is an excellent Washington Post article that summarizes the difficult situation well.

The disastrous situation in New Orleans is exhibiting how weblogs are becoming an increasingly important medium for disseminating urgent and specialized information. The Chronicle's excellent technology writer, Dwight Silverman, pushed the local newspaper into the blogosphere, and the brilliance of his vision is now being fulfilled by the his work and that of his colleagues. Kudos to Chronicle management for embracing this important information medium.

Posted by Tom at 12:05 PM | Comments (2) |

"You're a bully, Mr. Lanier, and you're not going to get away with it now"

That was one of the comments of Richard A. Epstein, the James Parker Hall Distinguished Service Professor of Law at the University of Chicago and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, during this heated exchange with Merck slayer Mark Lanier on Larry Kudlow's show over the merits of the Ernst v. Merck verdict. The debate comes on the heels of Mr. Epstein's impassioned criticism of the Merck/Vioxx fiasco in this Opinion Journal op-ed, in which he accused Mr. Lanier of intentionally misleading the jury during the trial. Here are the previous posts on the Merck/Vioxx case.

During the interview, Mr. Lanier resorts to throwing mud at Professor Epstein as his main argument, but the following exchange comes closest to a substantive exchange of positions:

Prof. EPSTEIN: Well, look, the government stories are based upon both the cost and the benefits. And we know that Vioxx in many ways, with respect to arthritic pain and with respect to intestinal discomforts and inflammations all of that stuff, is much better than any other drug. And whenever you want to make these assessments, you've got to look at the benefit side as well as the cause side. And so the judgment to use it is a perfectly sensible judgment. I've gotten, after I wrote my critique of Mr. Lanier in The Wall Street Journal, statements from physicians who just lamented the fact that they couldn't use the drug which they regarded as best for themselves and for other people. And what happens here is you are basically taking a set of risks, which are uncertain, and are using this to knock out a drug which, as best I can tell, is better than many of the alternatives. It's much too paternalism.

Mr. LANIER: Last word, if the professor had a student write that on an exam, he'd flunk him out of law school...

Prof. EPSTEIN: No, I would not.

Mr. LANIER: ...because it's simply not the case. The truth of the matter is, this was about Merck knowing it increased your risk of a heart attack five times and refusing to tell anyone because it wanted to make more money. The Merck document said, "If we can put off warning for just four months, we'll make an extra $229 million." And it's not whether or not you sell it, it's don't we have a right to know if it's going to kill us? And I think we have a right to know.

Hat tip to Walter Olson over at PointofLaw.com for the link to the Epstein-Lanier debate.

Posted by Tom at 7:14 AM | Comments (2) |

More on the Originalists

Following on this post from last week, Yale Law School Constitutional Law professor Jack Balkin (of the popular Balkinization blog) pens this Slate op-ed in which he makes the case against originalism and in favor of the "living Constitution" approach to interpreting the U.S. Constitution. He notes:

Nobody, and I mean nobody, whether Democrat or Republican, really wants to live under the Constitution according to the original understanding once they truly understand what that entails. Calls for a return to the framers' understandings are a political slogan, not a serious theory of constitutional decision-making.

In fact, the contemporary movement for originalism began as a conservative political slogan used to attack the Warren Court's decisions on race and criminal procedure. It mutated from a concern with the original intentions of the framers, to the intentions of the ratifiers, to how the public would have understood and applied the Constitution's words at the time they were adopted.

Today's originalism is hauled out to attack decisions that judges and politicians don't like. But when it comes to decisions they do like, or would be embarrassed to disavow, the same judges and politicians quickly change the subject. In practice contemporary originalists pick and choose when they will demand fidelity to original understanding. Sometimes they even mangle the history to get to results they like.

Professor Balkin closes with the following pragmatic defense of the living Constitutional approach:

In the long run, the Supreme Court has helped secure greater protection for civil rights and civil liberties not because judges are smarter or nobler, but because the American people have demanded it. When social movements like the civil rights movement or the feminist movement convince the center of the country that their claims are just, the court usually comes around. Sometimes it gets ahead of the center of public opinion, and sometimes it's a bit behind. But in the long run it reflects the national mood about the basic rights Americans believe they deserve. . .

Rather than a set of shackles designed by long-dead slave-owners, the framers bequeathed to us a Constitution that could adapt to the needs and aspirations of each succeeding generation. Their faith in the possibilities of the future, and our enterprise in realizing that future, have made us the great and free nation we are today.

Read the entire piece, and also Stuart Buck's blog post challenging a portion of Mr. Balkin's analysis.

Posted by Tom at 6:32 AM | Comments (1) |

Evaluating Katrina's damage to oil and gas production facilities

Officials of oil and gas companies and refineries with facilities in the path of Hurricane Katrina were scurrying around yesterday somewhat helplessly attempting to evaluate the extent of the storm's damage on key oil and natural-gas production facilities that rattled energy markets early yesterday. The bottom line is that it's going to take at least a few days -- and perhaps weeks -- to assess the damage fully and determine how long those facilities will be off-line.

Oil futures surged past $70 per barrel in overnight electronic trading on Monday, but fell back during the day. Oil for October delivery settled at $67.20, up $1.07 from Friday's price, but still below the previous record. When adjusted for inflaction, oil prices overall are still well below the high of $95.26 reached in April 1980.

Meanwhile, Hurricane Katrina set off a frenzy in the natural-gas trading pits, where the New York Mercantile Exchange imposed unprecedented emergency restrictions. Inasmuch as the U.S.'s major natural-gas-delivery terminal -- Louisiana's Henry Hub -- shut down early Sunday evening and did not reopen until midday yesterday, the Nymex Exchange declared an extremely rare "force majeure" delay of deliveries against its futures contracts. Although the force majeure declaration likely would cause only a minor delay in delivery on about 100 contracts (affecting a relatively small amount of $11 million in gas deliveries), such declarations nevertheless cause jitters in the gas markets that can affect prices.

Nymex gas futures for September delivery soared to a high of $12.07 per million British thermal units and settled up nearly 11% at $10.847, which was a record finish. The natural gas supply chain is particularly vulnerable to disruption because it must be moved at high pressure through specific delivery points and pipelines, while oil and other liquid fuels can be transported by truck, if necessary.

Another problem is that the nine Gulf Coast refineries that were shut down because of Katrina cannot be re-started by just flipping a switch. As noted in this Oil Drum post, restarting a refinery is a complicated process and, even in the best case, will require a period of several days to get back to 100% refining capacity. As noted yesterday, the Gulf region now supplies roughly one-quarter of the oil and natural gas consumed in the U.S. The New Orleans area alone is responsible for about 12% of domestic refining capacity that turns crude oil into gas for autos, jet fuel, heating oil and other products.

As the storm moved onshore, oil and gas companies began dispatching planes and divers into the Gulf of Mexico to begin evaluating the damage to rigs, pipelines and production platforms. Royal Dutch Shell PLC reported that two drilling rigs it had under contract -- Transocean's Nautilus and Noble Corp's Jim Thompson -- had been moved by the storm (the rigs are designed to float), but did not appear to be extensively damaged. Likewise, a BP PLC official fly-by inspection on Monday afternoon of several deepwater platforms also showed no significant damage. However, what takes more time to assess is possible damage to underwater pipeline infrastructure, which was already damaged last summer by underwater mudslides that resulted from the much smaller Hurricance Ivan.

Finally, don't miss Clear Thinkers favorite James Hamilton's piece on why Katrine could have a much bigger effect on the price of gasoline and natural gas than on the price of crude oil.

Posted by Tom at 4:57 AM | Comments (1) |

The Enron Task Force attempts to muzzle Sherron Watkins

When the Task Force fingered the record number of 114 co-conspirators in their legacy case against former Enron chairman Ken Lay, former CEO Jeff Skilling and former chief accountant Richard Causey, the Task Force effectively ensured that most defense witnesses would be chilled from testifying during the upcoming trial out of fear that their testimony would result in a retributive Task Force indictment. Moreover, when a targeted witness (Lawrence Ciscon) decided to testify on behalf of the defendants anyway during the recent Enron Broadband trial, the Task Force threatened him in an attempt to induce him not to testify. Rumors have been circulating in Houston for months of similar incidents involving other defense witnesses in regard to Enron-related trials, but the threatened witnesses are relunctant to describe such threats on the record out of fear of Task Force reprisal.

However, the lengths to which the Enron Task Force will go to suppress testimony in Enron-related cases reached truly absurd levels this past week when the Task Force filed this motion in the main Enron securities fraud class action attempting to postpone the testimony of the one witness who may talked more about Enron publicly than any other person -- Sherron Watkins.

You remember Ms. Watkins. She is the former mid-level Enron accountant who parleyed this warning memo to Mr. Lay into a lucrative talk-pundit career of waxing eloquent on all things Enron. She testified to a fawning Congressional committee, co-authored an Enron book, was one of the primary Enron employees interviewed during the Enron movie, and then made a few bucks on the rubber-chicken circuit as a whistleblower talking about the need for corporate reforms after Enron. The fact that Ms. Watkins was not a whistleblower (she never alerted anyone on the outside about alleged Enron improprieties) and that her memo to Mr. Lay characterized Enron's problems as primarily a public relations issue has gotten lost in the Enron milieu. Meanwhile, whereever there is a camera and a light, Ms. Watkins continues to be willing to pontificate about Enron.

Inasmuch as Ms. Watkins is mentioned 35 times in the plaintiffs' complaint in the Enron securities fraud class action, it is reasonable for the defendants to find out what she has to say under oath. However, Ms. Watkins is apparently also going to be a key prosecution witness in the upcoming criminal trial against Messrs. Lay, Skilling and Causey, so the Task Force in its motion suggests that Ms. Watkins' deposition testimony in the civil case would provide some kind of "unfair" advantage to the three former Enron executives in preparing to defend their freedom. As Mr. Lay's response points out, the Task Force's request to muzzle Ms. Watkins is without any meaningful basis, particularly given the fact that any tactical advantage that the Task Force may lose as a result of her tesimony in the civil case is miniscule because everyone knows about Ms. Watkins' views on Enron, anyway. In short, reasons Mr. Lay's lawyers, what's the big deal with a deposition of Sherron Watkins?

Well, the issue is not about Ms. Watkins' testimony. The real issue here is that the Justice Department and the Enron Task Force does not want the true story of Enron to be told in the Lay-Skilling-Causey criminal trial, just as it did not want the true story told during either the Enron-related Nigerian Barge trial or the Enron Broadband trial. As a result, the "Justice" Department is not about "justice" at all. Rather it is about fulfilling pre-conceived political notions of alleged wrongdoing regardless of whether those notions comport with the truth. To those of you who prefer to see that Messrs. Lay, Skilling and Causey be convicted of Enron-related crimes, please answer the following question -- Is this really the way in which you want that goal accomplished?

Posted by Tom at 4:00 AM | Comments (0) |

August 29, 2005

Shoe drops on eight former KPMG partners

With its deferred prosecution agreement with the government finalized, the first criminal indictments were filed today against former KPMG partners in connection with the creation and promotion of tax shelters that still threatens the firm ability to survive as a going concern. Today's indictment charges eight former KPMG executives -- including former KPMG deputy chairman Jeffrey Stein and four other lawyers (including one former Sidley Austin partner) -- with conspiracy for designing and marketing the fraudulent tax shelters. Here are the previous posts on KPMG's tax shelter woes, and here is the indictment.

Although the criminal charges and probable future charges against other KPMG personnel ensure bad publicity for the firm for years, the government's controversial decision to terminate former accounting giant Arthur Andersen by indicting that firm is ironically the reason that KPMG just may survive the fallout over the tax shelter indictmetns. With large public companies having so few other choices for auditors left, KPMG's still stout audit practice may be able to generate enough business to makeup for the loss of KPMG's once lucrative tax shelter practice.

The admissions that KPMG made today in connection with its deferred prosecution agreement will assist the government in prosecuting the indicted individuals and in future cases against other former KPMG partners, bankers, lawyers, and outside advisers who participated in creating and promoting the shelters. For example, KPMG admitted the tax shelter that it sold under the name "Bond Linked Issue Premium Structure" ("Blips") was a fraudulent tax shelter and admitted that the firm engaged in fraudulent conduct in connection with two other shelters, known as "Flip" and "Opis." Among the major banks that provided financing for the shelter transactions were Deutsche Bank AG, HVB Group and UBS AG, whose former executive -- Domenick DeGiorgio -- has already pled guilty to fraud and conspiracy charges in connection with the Blips transactions.

Here is the KPMG statement on the deferred prosecution agreement.

Posted by Tom at 1:55 PM | Comments (1) |

"My Daughter and Bill Murray"

This post is a father's description of his eight year old daughter's first date, which happened to be with Bill Murray, who introduced her "as my wife."

Posted by Tom at 6:58 AM | Comments (0) |

The betting on the effect of Katrina

The early bets on the effect of Hurricane Katrina are rising rapidly this morning as traders are reacting to what is turning out to be the worst-case scenario for the U.S. energy industry

In overnight electronic trading on the New York Mercantile Exchange, October crude-oil futures opened up more than $4 over Friday's close, topping $70 a barrel for the first time. September gasoline futures were up over 20 cents (over 10%) to around $2.12 a gallon. September natural-gas futures, which expire today, increased by more than $2 (over 22%) to about $12 per million British thermal units. Some energy analysts are predicting the possibility of $80-a-barrel oil and $15 per million British thermal unit natural gas as a result of the storm.

These increases followed a selloff Friday afternoon when it appeared Katrina would move on the eastern part of the Gulf of Mexico and spare oil and gas production and refineries in the central Gulf. Over Friday night, the category 4 hurricane moved on a more westerly course that it through the middle of the oil and gas-producing areas of the central Gulf and the Louisiana refining system, which generates about 15% of total U.S. capacity. The Gulf of Mexico is the source of about a fifth of U.S. gas production and more than a quarter of U.S. oil production.

Three of the key facilities for the Gulf region's oil and gas production have been shut down by the storm -- the Louisiana Offshore Oil Port, the "Superman" facility that receives and distributes imports of crude oil, and Port Fourchon, which supports much of the Gulf's oil-and-gas production facilities, and the Henry Hub, which is the pipeline nexus for the U.S. natural gas industry and the delivery point for the Nymex futures contracts.

By the way, for an impressive picture loop of Katrina, check out this website. And, unfortunately, longtime New Orleans blawger Ernie the Attorney was not able to get out of New Orleans in time, so he is riding out Katrina in New Orleans.

Posted by Tom at 5:14 AM | Comments (0) |

Criminalizing statements that perpetuate a myth

Regulation FD requires full disclosure of securities issuers’ communications with analysts for the supposed purpose of protecting the hypothetical ordinary investor. It's one of those regulations that sounds good on the surface, but fails miserably in practice.

The truth is that Reg FD attempts to regulate statements that perpetuate a myth -- i.e., that the securities markets are a level-playing field for the ordinary individual investor. In fact, securities markets are hopelessly rigged against the individual investors, who really have no business attempting to compete in those markets against the pros. Rather, study after study has shown that the individual investor would be much better off simply investing in index funds rather than operating under the myth that the securities markets are fairer for the ordinary investor than, say, playing the slots in Las Vegas.

Nevertheless, most securities regulation is premised on the assumption that the little guy investor needs to be protected from being taken advantage of by the sharpies. Without such regulations, the theory goes, the ordinary investor will think that the securities markets are rigged and will not participate, which hurts those markets. Larry Ribstein aptly coined this syndrome of regulating statements that perpetuate the myth that securities markets are safe for ordinary investors as "the great securities regulation scam." As Larry notes in this post:

In short, capitalism and its regulators desperately need to hide fundamental truths about investing from the little guy. You might say the whole setup is a vast conspiracy that depends on investors being foolish and irrational and does everything it can to perpetuate this irrationality.

With that backdrop, Bruce Carton of the Securities Litigation Blog and Larry had some fun with the announcement last week that the government has broadened its investigation into Dreamworks to include Pixar's over-estimation of sales of its Incredibles DVD and "whether showing a gathering of analysts a prescreening of a movie constitutes disclosure of material information to a group of select people." Larry comments:

How far is this going to go? Twenty years ago when I lived in Macon, Georgia, we used to get a lot of previews. I think it was the "play-in-Peoria" phenomenon. Maybe that's still true. I remember seeing a sneak preview of ET, before I'd seen any publicity on the film. I decided that it was shlock filmmaking, not up to Spielberg's earlier Duel, but was convinced it would be phenomenally successful. I almost went and bought some stock, and regretted not doing so for years.

Now I wonder, would this have been wrong of me? Even criminal?

And while regulating the pre-screening of movies borders on the absurd, the criminalization of similar statements is downright scary. As we recently witnessed in the Enron Broadband trial -- which largely involved prosecution of statements made to securities analysts -- these are not easy cases to prosecute, even where the government has promoted an effective propaganda campaign in support of its case. As a result, prosecutors -- whose careers may depend on a successful prosecution in such a high-profile case -- are highly incentivized to cross the line and utilize abusive tactics to buttress their difficult case, such as intimidating witnesses, eliciting false testimony from a key witness, and violating limine orders.

When such government abuse results from enforcement of laws to regulate these statements, it makes you appreciate the wisdom behind a certain Constitutional Amendment that really ought to protect those statements from regulation.

Posted by Tom at 4:00 AM | Comments (1) |

August 28, 2005

Andy Pettitte

Pitcher Andy Pettitte is the subject of the fifth in the ongoing series about the key Stros players (previous posts here, here, here and here).

Pettitte is the hometown boy (Deer Park High School in suburban east Houston area) who returned to Houston in 2004 with a $31.5 million three year contract after a brilliant nine year stint with the New York Yankees that coincided with the Yankees winning four World Series Championships. Pettitte's first season was highly frustrating as an elbow injury resulted in a premature end of the season before the Stros caught fire and came within a game of the World Series. One would not be going out on a limb to suggest that the Stros would have made the World Series in 2004 had Pettitte been able to pitch the entire season.

Despite that disappointment, Pettitte has rebounded this season with one of the best seasons of his career, currently 4th in the National League in runs saved against average ("RSAA", explained here). Under contract to the Stros at $17.5 million for one more season, the 33 year old Pettitte is at a crossroads -- he probably still has several more seasons left in his tank, but the final season of his contract coincides with the Stros over-priced contract on Jeff Bagwell, so it is unlikely the Stros would pay an aging Pettitte at the same level that the club would pay younger pitchers such as Oswalt and Lidge. On the other hand, the Stros would love to have Pettitte as the elder statesman of their Berkman-Oswalt-Ensberg-Lidge nucleus over the next several years. Accordingly, if Pettitte is willing to take less to continue playing near home, then a deal is definitely possible that would likely keep Pettitte a Stro until he retires. His impressive stats are here.

Posted by Tom at 2:36 PM | Comments (1) |

Andy Pettitte statistics

Andy Pettitte
YEAR	AGE	RSAA	ERA	G	GS	IP	SO	SO/9	BR/9	W	L	NW	NL
2003	31	8	4.02	33	33	208.1	180	7.78	12.01	21	8	16	13
2004	32	4	3.90	15	15	83	79	8.57	11.06	6	4	5	5
2005	33	33	2.60	26	26	176.2	137	6.98	9.93	12	9	15	6
CAR		167	3.82	324	317	2052.1	1491	6.54	12.31	167	91	150	108
LG AVG		0	4.65			2052.1	1441	6.32	13.28	115	115

Posted by Tom at 2:35 PM | Comments (0) |

Thoughts about Martha

Martha Stewart -- who was unjustly prosecuted and convicted for allegedly misleading the government about an supposed crime that the government could not prove -- finishes the home confinement component of her sentence next week. Ellen Podgor (she of "Busted for Yoga" fame) wonders in this post which of the following will be the legacy of the Stewart case:

1. Tell the truth to the government when questioned.

OR

2. Don't talk to the government when they seek information.

Given recent developments in other cases (here, here and here), the following alternative might also be added:

3. Waive the attorney-client privilege, offer up others as sacrificial lambs for the government to prosecute, and enter into a deferred prosecution agreement with the government to avoid criminal charges.

Posted by Tom at 8:02 AM | Comments (0) |

August 27, 2005

A potential disaster may be developing along the Gulf Coast

For years, experts have been warning that a potential disaster looms if a major hurricane hits the New Orleans metropolitan area, much of which sits beneath sea level. It is beginning to look as if those predictions may come true later this weekend.

Over last evening, Hurricane Katrina took a westward course away from the Mobile, Ala.-Florida Panhandle area and appears to be headed directly for the New Orleans area.

This website (be patient, takes awhile to load) shows the catastrophic flooding that will occur in the New Orleans area as a result of a category 3 hurricane. Hurricane Katrina is currently predicted to hit the Louisiana coast as either a category 4 or even a 5 storm. Hat tip to my friend Scott Hagen for the link to this website.

If you are in New Orleans and reading this post, you should seriously consider getting out. Now.

Posted by Tom at 12:33 PM | Comments (2) |

KPMG - DOJ settlement done

The anticipated settlement of criminal charges over KPMG, LLP's creation and promotion of allegedly illegal tax shelters has been finalized between the accounting firm and the Department of Justice and will be announced on Monday. Here are the previous posts on KPMG and its tax shelter saga.

Under the deal, KPMG will pay $456 million in fines, accept former chairman of the Securities and Exchange Commission Richard C. Breeden as an independent monitor of the firm's operations through at least 2006. The firm will also agree to limits on the scope of its tax practice and continue to serve up to prosecutors for possible criminal charges former KPMG partners and other professionals who worked on the tax shelters, which the DOJ contends cost the U.S. Treasury at least $1.4 billion in unpaid taxes. KPMG allegedly earned fees of $124 million on creating and promoting the tax shelters to about 350 clients.

As noted in earlier posts, the settlement with the Justice Department does not mean that KPMG is out of the woods yet by any stretch. KPMG still faces potentially enormous civil liability as a result of its admission of wrongdoing in regard to the tax shelters. Even more importantly, KPMG's serving up of its former partners on a platter to prosecutors has so damaged partner morale at the firm that key partners may leave the mess behind for greener pastures at competitor firms. Thus, even when it tries to do so, the federal government may not be capable of avoiding an Arthur Andersen-type meltdown of one of the few remaining big accounting firms available to handle the increased regulatory requirements that the government has imposed on public companies.

Update: This NY Sunday Times article -- purportedly based on inside sources -- tells the story on how KPMG's management came to embrace, and then abandoned the defense of, the tax shelter promotion scheme.

Posted by Tom at 4:46 AM | Comments (0) |

August 26, 2005

Morgan Ensberg's remarkable season

The subject of the fourth segment of the series of posts analyzing the key Stros players (previous posts here, here, and here) is thirdbaseman Morgan Ensberg, who is enjoying one of the best seasons of any hitter in Stros history.

Ensberg is a late bloomer out of college baseball, who came up through the Stros' farm system with fellow USC baseball star Jason Lane. Interestingly, Lane was always considered the better prospect, but Ensberg was the one who burst on to the Stros scene first with his strong first full season in 2003.

Unfortunately for Ensberg and the Stros, that first season coincided with the tenure of former Stros manager Jimy Williams, whose inexplicable prejudice against young players prompted him to platoon Ensberg that season with the far inferior Geoff Blum (-23 RCAA (ouch!)/.295 OBA/.379 SLG/.674 OPS). As noted in this post from last season regarding Williams' managerial limitations, a good case can be made that Williams' decision to take away at bats that season from Ensberg by platooning him with Blum was the difference between the Stros winning the NL Central Division in 2003 and finishing second to the Cubs by a measly one game.

For the first half of 2004, Ensberg endured the difficult combination of Williams as manager and tendonitis in his right elbow that hampered his capacity to drive the ball. Accordingly, his offensive productivity plummeted and he ended up platooning much of the season with Mike Lamb, who had a much better 2004 season than the one he's having this season.

Despite his bad 2004 season, Ensberg has bounced back to become one of the five best hitters in the entire National League this season. If he finishes out this season at the same level that he has played to date, Ensberg will join Bagwell, Berkman, Moises Alou, and Richard Hidalgo as having one of the top ten most productive hitting seasons in Stros history. With this fine season in hand, the 30 year old Ensberg joins Berkman, Oswalt, and Lidge as a fine nucleus for the Stros to build around over the next several seasons.

Ensberg's stats are here.

Posted by Tom at 2:12 PM | Comments (0) |

Morgan Ensberg statistics

Morgan Ensberg
YEAR	AGE	RCAA	OBA	SLG	OPS	AVG	HR	RBI	SB	G
2003	27	20	.377	.530	.907	.291	25	60	7	127
2004	28	-12	.330	.411	.742	.275	10	66	6	131
2005	29	37	.389	.581	.971	.287	33	91	6	125
CAR		41	.364	.497	.861	.280	71	236	21	436
LG AVG		0	.340	.431	.772	.269	44	180	22
POS AVG		-6	.335	.430	.765	.267	45	191	14

Posted by Tom at 2:10 PM | Comments (0) |

Big banks taking a flyer on UAL

UAL Corp.'s shopping excursion for reorganization take-out financing has apparently resulted in a preliminary commitment of a cool $3 billion in financing from four lending lending institutions that, if consummated, would allow the troubled airline to emerge from over three years in chapter 11. The four lenders involved in the negotiations with UAL are apparently Citigroup Inc., J.P. Morgan Chase & Co., General Electric Co. and Deutsche Bank AG.

The take-out financing would allow UAL to repay a $1.3 billion debtor-in-possession loan it has been relying on during its chapter 11 case, and will be incorporated in a reorganization plan that the company plans to file with its Chicago Bankruptcy Court soon. In the meantime, UAL continues to bleed, incurring a net loss of almost $275 million for July as the company incurs huge non-cash reorganization expenses relating to renegotiation of leases on key aircraft.

Meanwhile, Northwest Airlines contemplates replacing UAL in chapter 11 -- perhaps prior to October 17 -- as it continues to deal with a machinist's union strike. Although Northwest reported decent liquidity of $2.1 billion as of June 30, the company is currently heading toward four straight years of operating losses, most recently reporting net losses of $450 million in the first quarter and $217 million in the second quarter of this year. In addition to ever-increasing fuel prices, Northwest is also trying to figure out a way to deal with its various pension plans, which are currently underfunded to the tune of $3.8 billion.

As has been noted before here, it's darn hard to pull the plug on even an incredibly unprofitable airline.

Posted by Tom at 5:45 AM | Comments (0) |

Did Gordon Gekko think of that?

Well, the government's seemingly relentless campaign to criminalize business in the post-Enron era has finally reached the one industry -- the movie business -- that relishes such matters when they happen to somebody else.

The Wall Street Journal ($) is reporting today (free article here) that an ongoing investigation into DreamWorks Animation SKG Inc has been broadened by an SEC informal inquiry into Pixar Animation Studios after Pixar had over-estimated the number of sales upon its release of The Incredibles DVD.

This particular saga began when DreamWorks cut its earnings forecasts twice after heavy returns of its Shrek 2 DVD. In the case of DreamWorks, the SEC is apparently focusing on whether the studio should have informed investors earlier of the problems with Shrek 2 given the studio's knowledge that DVDs were having an increasingly short shelf life than previous DVD issues. DreamWorks shares fell about 5% in May ahead of the release of its first-quarter results after an online report predicted that the results would be worse than expected, and then the company subsequently warned of lower earnings forecasts because Shrek 2 DVD sales had fallen short of expectations. Similarly, on June 30, Pixar announced that it would miss its second-quarter earnings because it had underestimated the rate of returns by retailers of The Incredibles DVD and that sales of the movie's DVD had fallen about 7% short of estimates.

The studios are probably already working on a documentary similar to this one. As for what such a film would look like, Professor Ribstein -- the expert on how business is portrayed in films -- presents his case.

Posted by Tom at 4:56 AM | Comments (0) |

Prosecution increases the stakes in another trader case

The Justice Department announced Thursday that it has filed a superseding indictment alleging additional counts of wire fraud and reporting fake trades against former El Paso Corp. trader Donald Burwell. The superseding indictment is the latest development in a series of criminal cases that the U.S. Attorney's office for the Southern District of Texas has been pursuing against former traders of natural gas who worked for various Houston-based companies. Previous posts on the trader cases are here, here, here, here, here, here, here and here.

Mr. Burwell was previously charged in November 2004 with one count each of conspiracy, false reporting and wire fraud relating to his involvement in the transmission of allegedly inaccurate trade reports to an industry newsletter in July 2000. The latest superseding indictment incorporates the pending charges and adds two counts of false reporting and two counts of wire fraud relating to allegedly inaccurate trade reports that Burwell was allegedly involved in transmitting to trade publications in August and October, 2000.

The case against Mr. Burwell is one of 10 that the Justice Department is pursuing in regard to alleged manipulation of natural gas trading indexes, which are used to value billions of dollars in gas contracts and derivatives. Industry publications such as Inside FERC Gas Market Report use data from traders to calculate the index price of natural gas, which affects the level of profits that traders can generate. In Mr. Burwell's case and in the related trader cases, it remains unclear in what context the allegedly false information was transmitted or whether the publication even used any false information. However, the government's theory of criminal liability is that it needs only to prove that fake trades were reported to the publications and not that the trades were actually published or affected the markets.

As noted in previous posts here and here, this superseding indictment appears to be a transparent effort by the government to increase the alleged market loss attributable to the alleged false reporting for purposes of seeking a longer jail term for Mr. Burwell. Inasmuch as Justice Department lawyers have been making some rather absurd positions on that particular issue in other cases recently, it remains to be seen whether the Justice Department's attempt to increase the stakes in the prosecution will bludgeon yet another defendant to cop a plea in the hopes of avoiding a Jamie Olis-like prison sentence.

Nine other former traders have been charged in similar cases. Six of those traders (five from El Paso and one formerly of Reliant Energy) have pleaded guilty to the fake reporting charges, while three others are awaiting trial, including former Dynegy trader Michelle Valencia, former El Paso trader Greg Singleton, and former El Paso trader James Phillips, whose trial is tentatively scheduled to commence next month.

Posted by Tom at 4:15 AM | Comments (0) |

Biggio and Lane

Continuing on our series of posts (previous posts here and here) providing a more thorough statistical analysis of the Stros' key players, today we examine the star-crossed careers of Craig Biggio and Jason Lane.

Bidg is already a Stros legend and may well be the first true Stros player to be elected to the Baseball Hall of Fame. Bidg was the best secondbaseman in Major League Baseball during the decade of the 90's, and baseball stat guru Bill James has rated him as the fifth best secondbaseman in Major League Baseball history. Accordingly, Bidg's place as one of the best Stros players of all-time is well-secured.

However, even though Bidg remains a formidable presence at the age of 39, his skills are facing the inevitable erosion that comes with aging, particularly as each season drags into the dog days of summer. Bidg is now barely an above-average National League hitter and he is well below-average defensively. Given his age, Bidg's performance is unlikely to improve over the next couple of seasons as he pursues his goal of 3,000 base hits, and his presence in the lineup blocks younger players who -- given the game experience that Bidg is occupying -- would likely produce more for the Stros than Bidg will.

Which brings us to Lane, who is a good example of the complications that occur as a result of the Stros' decision to placate Bidg. Lane had long been one of the best hitters in the Stros' farm system and was ready to play full-time in the major leagues three seasons ago. However, the Stros decision to sign Jeff Kent to play second base and to move Bidg to the outfield effectively blocked Lane from a starting role with the Stros until this season.

Thus, rather than a rising star in his mid-20's gaining valuable playing experience, Lane is now effectively a 29 year old rookie struggling from time to time as he plays his first full season as a Major League starter. As a result, the Stros may well have left several of Lane's most productive seasons on the bench, and if Stros management placates Bidg's desire to play at least a couple more seasons at second base, then the Stros risk delaying the development of Chris Burke in the same manner.

So, the Stros face a tough decision with regard to Bidg. The good thing is that Bidg is not a particularly expensive player anymore and remains a great presence in the clubhouse. Nevertheless, players such as Lane and Burke have more productive seasons to provide for the club than Bidg, and delaying those contributions risks hurting the ballclub's performance.

Finally, as for each player's statistics, Bidg is a very productive 39 year old ballplayer, but -- as noted above -- he has seen his better days and now is just an average National League player, at best. Lane has had an up and down season, which is not unusual for a player enduring his first season as a major league starter. He has shown flashes of power, but he lacks plate discipline, which has resulted in far too few walks and, thus, a below-average on-base average. Lane is an above-average defensive player in right field, so if he can develop more plate discipline over the next couple of seasons, he has a chance of being a well above-average National League player for the next five seasons or so. That would fit nicely into the Stros' nucleus of Berkman, Oswalt, Lidge and Ensberg.

Biggio and Lane's key statistics are here.

Posted by Tom at 4:10 AM | Comments (2) |

Biggio and Lane statistics

Craig Biggio
YEAR	AGE	RCAA	OBA	SLG	OPS	AVG	HR	RBI	SB	G
2003	37	1	.350	.412	.763	.264	15	62	8	153
2004	38	8	.337	.469	.806	.281	24	63	7	156
2005	39	7	.334	.456	.790	.269	17	50	11	122
CAR		353	.371	.436	.807	.285	251	1044	407	2531
LG AVG		0	.338	.419	.757	.268	274	1213	205
POS AVG		-102	.333	.392	.726	.265	198	1022	229

Jason Lane
YEAR	AGE	RCAA	OBA	SLG	OPS	AVG	HR	RBI	SB	G
2003	26	3	.296	.815	1.111	.296	4	10	0	18
2004	27	3	.348	.463	.812	.272	4	19	1	107
2005	28	1	.306	.499	.804	.260	19	61	6	111
CAR		11	.323	.509	.832	.267	31	100	8	280
LG AVG		0	.340	.430	.770	.269	19	80	10
POS AVG		10	.349	.461	.810	.271	24	88	10

Posted by Tom at 4:00 AM | Comments (0) |

August 25, 2005

Curt Sampson on Bobby Jones

Curt Sampson has already written the best biography on Ben Hogan, and now he is attempting to equal that feat in regard to Bobby Jones, who remains the only golfer to win the Grand Slam of Golf in the same year and who retired from competitive golf almost immediately after doing so. Mr. Sampson's new book on Mr. Jones is excerpted in this Golf World piece entitled Bobby in a New Light - Seventy-five years after his Grand Slam, Bobby Jones is more compelling than the myths surrounding him:

[L]ike Lincoln and Churchill and Marilyn Monroe, Jones led a life big enough to be considered from a variety of angles and with varying levels of awe and skepticism. Perhaps by considering his life in reverse, we can appreciate golf's greatest hero in a new light. After all, he won the Slam at age 28, and then quit the game. He lived 41 more years.

Hat tip to Geoff Shackelford for the link to the Golf World piece.

Posted by Tom at 7:37 AM | Comments (0) |

"Slime in the Ice Machine" Online

The City of Houston webpage now provides this online search tool for reviewing current health department reports on Houston restaurants and other eating establishments. It's sort of like an online version of Marvin Zindler's "Slime in the Ice Machine" local television segments.

As an aside, after watching one of Marvin's slime machine reports while on his first evening visiting Houston several years ago, a London solicitor asked me the following question in that quintessentially understated manner shared by many British lawyers:

"To what parallel universe have I been transferred?"

Some of the online reports are quite interesting. For example, as a result of this one, my wife and daughters are going to be avoiding an inexplicably popular restaurant in the Galleria.

Posted by Tom at 6:42 AM | Comments (1) |

Key questions on American health care

Malcolm Gladwell's recent New Yorker polemic regarding the state of American health care prompts Marginal Revolution's Tyler Cowen to post this handy list of observations on the key issues facing the American health care system. One point that Tyler makes is particularly important:

The U.S. health care system probably is the world's best for some class of people, namely the well-off and I don't mean just the super-rich. Trying to extend those benefits -- however this might be accomplished -- is a better approach than nationalizing the sector.

Mr. Gladwell's piece falls into the common trap of blurring the issues relating to the quality of American health care -- which is quite good -- with the issues pertaining to the way in which America finances health care, which is not so good. Tyler's post does a much better job of delineating that key distinction.

Posted by Tom at 6:01 AM | Comments (2) |

Contingent fees and tort reform

The jury verdict in the Merck/Vioxx trial generated a good bit of debate about tort reform, and one of the common topics in that discussion is the effect that contingent fees have on the civil justice system. Contracting for a contingent fee is a way in which a plaintiff can hedge the cost of a lawsuit by shifting a portion of the risk of loss to an attorney. Many tort reformers propose to do away with -- or at least severely restrict -- contingent fees on the premise that they inevitably lead to increased frivolous litigation.

Along those lines, Ted Frank passes along this interesting AEI project from Alex Tabarrok (of Marginal Revolution fame) and Eric Helland in which they review the results of their study on the probable effects of limiting contingent fees. In short, they question whether the purported benefit of capping contingent fees merits the extreme measure of limiting the contractual right of a plaintiff to contract for a contingent fee:

If America is a "lawsuit hell," then contingent-fee lawyers are often considered its devils. Contingent fees have been called unwarranted and the lawyers who accept them have been denounced as unethical and uncivilized. Furthermore, in the midst of increased filings and escalating awards, it is difficult not to notice that some plaintiffs' lawyers have become very rich. As a result, tort reformers have called for limits on contingent fees and many states have obliged. But limits have been enacted without any evidence that contingent fees were either responsible for the liability crisis or that limiting them would produce benefits.

This study, one of the first empirical examinations of contingent-fee limits, finds that contingent fees benefit plaintiffs and do not cause higher awards. Furthermore, contingent-fee limits are unlikely to reduce lawyers' income very much, since they will simply switch to hourly fees. Since hourly fee lawyers are willing to take more cases to court than contingent-fee lawyers, contingent-fee limits can increase the number of low-value "junk suits."

Tort reform is an important goal, but limiting the contractual rights of plaintiffs and their lawyers is an unattractive and likely ineffective method of achieving that goal.

Posted by Tom at 5:29 AM | Comments (1) |

August 24, 2005

The amazing Roger Clemens

The Stros lost last night, but not due to any lack of effort from Roger Clemens. The Rocket continued his amazing season as the best 43 year old pitcher in the history of Major League Baseball, which only serves to cement his place as one of the three best pitchers in Major League Baseball history. Following in line with this earlier post on providing more detailed statistical analysis on the performance of Stros players, some of Clemens' amazing statistics are set forth below. "NW" and "NL" refer to "Neutral Wins" and "Neutral Losses," which are the number of wins and losses that Clemens would have had if his team had always generated a league average number of runs in support of his pitching. Here are the stats.

Posted by Tom at 12:45 PM | Comments (2) |

Roger Clemens statistics

Roger Clemens
YEAR	AGE	RSAA	ERA	G	GS	IP	SO	SO/9	BR/9	W	L	NW	NL
2003	41	10	3.91	33	33	211.2	190	8.08	11.14	17	9	14	12
2004	42	32	2.98	33	33	214.1	218	9.15	10.67	18	4	15	7
2005	43	54	1.56	26	26	178.1	162	8.18	8.43	11	6	15	2
CAR		699	3.12	666	665	4671.1	4479	8.63	10.82	339	170	336	173
LG AVG		0	4.38			4671.2	3109	5.99	12.95	262	262

Posted by Tom at 12:44 PM | Comments (0) |

Structured finance to the rescue

Professor Ribstein notes an interesting development in the entertainment business, where creative financial types are securitizing revenue streams from artists' work into financial instruments such as "Bowie Bonds," which are then sold to investors to provide an income source for the artists and their recording studios. Given the revenue loss that some artists and record companies have incurred as a result of illegal downloads, Larry notes the sweet irony of capitalists rescuing "the artists from the non-respecters of property rights."

Unfortunately, this creativity will only last until the government figures out what is really going on and puts a stop to it.

Posted by Tom at 8:33 AM | Comments (0) |

Securities litigation is like Being John Malkovich?

Peter Henning comes up with that apt description of Bruce Carton's analysis of the black hole that is developing in the securities litigation arena, where litigation seemingly begets litigation about the original litigation. The latest example is speculation over Milberg Weiss becoming a class action target as a result of the criminal investigation into the firm's handling of dozens of class actions over the years. Cracks Bruce, "Presumably the lawyers bringing any shareholder lawsuit against Milberg would be . . . lawyers who only file non-frivolous lawsuits seeking non-outrageous punitive damages."

In discussing all of this, Bruce refers to this hilarious Toronto Globe and Mail commentary on the imminent securities class action against CIBC that will claim damages caused by CIBC's recent generous settlement of claims against it in the Enron securities class action lawsuit:

While CIBC's shareholders may indeed have the right to feel like they're stuck in the intensive care unit without health coverage, the logic in taking this to court would seem distinctly fuzzy. If they blame the Enron settlement for hitting the value of their shares, what happens when their lawsuit is launched? Won't the share price drop even further? And when that happens, shouldn't they sue themselves? And eventually, won't they have to end up paying billions to themselves to have their own lawsuit go away?

In the end, CIBC's share price would be sucked in on itself and go into negative territory, a kind of financial black hole that only Stephen Hawking would understand.

Posted by Tom at 8:03 AM | Comments (0) |

Stop daydreaming!

According to this Washington Post article, now daydreaming may be hazardous to your health:

The brain areas involved in daydreaming, musing and other stream-of-consciousness thoughts appear to be the same regions targeted by Alzheimer's disease, researchers are reporting today in an unusual study that offers new insights into the roots of the deadly illness.

While some unknown third factor may be responsible for triggering daydreaming as well as Alzheimer's, . . . a causative link between the two would explain a mystery that has long bothered scientists: why Alzheimer's generally affects memory first. . . [T]the undirected thought patterns that most people slip into readily may result in the kind of "wear and tear" that ends in Alzheimer's disease, . . .

This theory, however, clashes with the evidence that intellectual activity plays a protective role against Alzheimer's disease. Far from the "wear and tear" model, other research has suggested that the brain runs on a "use it or lose it" system.

The best observation in the article is from a scientist who cautions that the findings are preliminary and should be taken with a grain of salt:

"I look forward to the public health campaign to stop people from engaging in these dangerous, risky behaviors," he quipped. "Maybe we can equip ourselves with anti-daydreaming monitors that shock us when we slip into reverie."

Read the entire article.

Posted by Tom at 7:28 AM | Comments (0) |

Don Willett to be nominated for Texas Supreme Court seat

The Chronicle is reporting this morning that 39 year-old Don Willett, an Austin attorney with close ties to President Bush, will be nominated today by Governor Rick Perry to replace Priscilla Owen on the Texas Supreme Court.

Mr. Willett is a native Texan who graduated from Baylor University and received a JD with honors and an AM in Political Science from Duke University in 1992. After law school, Mr. Willett clerked for Judge Jerre S. Williams of the U.S. Court of Appeals for the Fifth Circuit and then worked in employment law at the Austin office of Haynes & Boone for several years.

From 1996-2000, Mr. Willett served as Research/Special Projects Director for then-Governor Bush in Texas and advised Mr. Bush on various political and legal issues. He parlayed that position into a Domestic Policy & Special Projects Advisor position on the Bush-Cheney 2000 Presidential Campaign and then later on the Presidential Transition Team. In 2002, Mr. Willett was appointed as Deputy Assistant Attorney General in the Office of Legal Policy where he developed civil and criminal justice initiatives and special projects for the President, including coordinating assistance with judicial nominations and confirmations. After that stint, Mr. Willett served as Special Assistant to the President and Director of Law and Policy for the White House Office of Faith-Based & Community Initiatives and, most recently, as a key advisor for his old friend, Texas Attorney General Greg Abbott.

After nomination, Mr. Willett could serve on the Supreme Court without Senate confirmation until the Legislature is called into session, but he would still have to run for election to the seat next year.

Posted by Tom at 6:37 AM | Comments (0) |

Judge Hughes hammers the FDIC in the Hurwitz case

One of the more interesting (and longstanding) local civil lawsuits turned an interesting corner yesterday.

U.S. District Judge Lynn Hughes -- unquestionably the Houston federal judge most likely to challenge the government's position in any case -- handed down this 133 page broadside yesterday ordering the Federal Deposit Insurance Corp. to pay Houston financier and longtime environmentalist target Charles Hurwitz $72.3 million in sanctions for the FDIC's conduct in connection with prosecuting a civil lawsuit to hold Mr. Hurwitz and other directors of the defunct United Savings of Texas personally responsible for $250 million in connection with the $1.6 billion loss resulting from the S&L's 1988 failure.

There is a lot of background to this saga. The FDIC sued Mr. Hurwitz -- the chairman and chief executive of Houston-based Maxxam Inc. -- and other United Savings directors (including the talented Barry Munitz) in 1995. Interestingly, the FDIC did not contend in the lawsuit that Mr. Hurwitz and Maxxam had looted United Savings; rather, the agency contended merely that Mr. Hurwitz and Maxxam had an obligation to invest more money in the sinking ship of United even after it was clear that the S&L was going down the tubes.

Meanwhile, Mr. Hurwitz and his attorneys smelled a rat, and they contended in a counterclaim that the lawsuit was simply a device to mollify environmentalists and pressure Maxxam subsidiary Pacific Lumber to give up 5,000 acres of redwood forests in Northern California. The FDIC denied any such political motivation, but discovery in the lawsuit revealed that the FDIC representatives had, in fact, consulted extensively with environmental groups on the so-called "debt-for-nature" swap before filing the lawsuit. Judge Hughes was not pleased when that evidence was revealed to him, and he reiterated that displeasure in his opinion:

"The record shows that the swap was the only reason for this suit. It also shows that the FDIC knew that it had no factual or legal basis for its claims, and that its cases here and in Washington were shams."

At any rate, the lawsuit lagged on for years, and I had a running joke with Mr. Hurwitz's attorneys when I would see them at the federal courthouse that they were engaged in the legal equivalent of Bill Murray's plight in Groundhog Day. After imnumerable run-ins with Judge Hughes, the FDIC tried to just drop the whole mess in 2002, but Mr. Hurwitz refused to drop his counterclaim against the agency for improperly funding another government agency's investigation against Maxxam on the same subjet matter of the lawsuit. As a result of that investigation, the Office of Thrift Supervision filed a similar suit against Mr. Hurwitz and Maxxam for $821 million, but settled that lawsuit in 2002 for a paltry $200,000.

As usual, Judge Hughes is acerbic in his opinion regarding the FDIC's conduct, noting in particular that FDIC officials "lied about it all under oath" and they "discarded the mantle of the American Republic for the cloak of a secret society of extortionists." Another gem:

"It's hard to find a word that captures the essence of the FDIC's bringing this action. Irresponsible is close. Arbitrary, dishonest, exploitative, extortionate, and abusive all fit."

Judge Hughes concluded that Hurwitz and Maxxam "will recover their costs because the record reveals corrupt individuals within a corrupt agency with corrupt influences on it, bringing this litigation." The $72.3 million awarded to Maxxam and Hurwitz covers attorneys costs and interest incurred in connection with the governmental investigations, which will be reduced to $15.3 million if the Fifth Circuit rules that Mr. Hurwitz and Maxxam can only recover costs from the FDIC.

Posted by Tom at 5:21 AM | Comments (1) |

August 23, 2005

Berkman and Oswalt

From time to time, I am going to pass along detailed statistics on the Stros' players. In last night's win, two of the players around whom the Stros will build over the next several years -- Lance Berkman (whose stats are down a bit this season as he is playing while rehabbing from off-season knee surgery) and Roy Oswalt -- had good games. Their respective statistics are here, including how they compare against the National League average. They are two of the best players in the National League at their respective positions.

Posted by Tom at 4:17 PM | Comments (0) |

Berkman and Oswalt statistics

Lance Berkman
YEAR	AGE	RCAA	OBA	SLG	OPS	AVG	HR	RBI	SB	G
2003	27	40	.412	.515	.927	.288	25	93	5	153
2004	28	69	.450	.566	1.016	.316	30	106	9	160
2005	29	21	.408	.493	.901	.293	13	53	2	95
CAR		275	.415	.555	.971	.302	169	588	42	870
LG AVG		0	.342	.434	.776	.269	95	384	49
POS AVG		67	.359	.472	.830	.276	121	435	56

Roy Oswalt
YEAR	AGE	RSAA	ERA	G	GS	IP	SO	SO/9	BR/9	W	L
2003	25	21	2.97	21	21	127.1	108	7.63	10.60	10	5
2004	26	22	3.49	36	35	237	206	7.82	11.62	20	10
2005	27	33	2.68	27	27	191.2	134	6.29	10.57	15	10
CAR		138	3.02	147	137	930.2	800	7.74	10.82	78	37
LG AVG		0	4.26			930.2	695	6.72	12.76	52	52

Posted by Tom at 4:16 PM | Comments (0) |

New Fifth Circuit automatic stay decision

To proceed or not to proceed? That is often the question that a creditor has in regard to taking further legal action against a debtor that has just filed a bankruptcy case.

Under section 362 of the Bankruptcy Code, a wide-ranging injunction -- dubbed the "automatic stay" -- arises immediately upon the filing of a bankruptcy case. That injunction enjoins -- pending further Bankruptcy Court order -- most legal actions by creditors against either the debtor or the debtor's property, which is referred to in bankruptcy parlance as "property of the [debtor's] estate." Although the automatic stay is quite clear, it is often decidedly unclear whether a particular piece of property is "property of the estate" at the time of a debtor's bankruptcy and, thus, subject to the automatic stay against creditor actions. Given that it is rarely a good idea to violate a court-imposed injunction, the breadth of the stay is an issue that tends to interest most business lawyers and businesspeople.

The Fifth Circuit recently addressed the issue in Brown v. Chesnut and held that the creditor should err on the side of presuming that the automatic stay applies or risk sanctions for violating the stay. Writing for the Court, Judge Clement concluded that the automatic stay is violated where a creditor forecloses on property that "arguably" belongs to the debtor, even though a state court subsequently determines that it is not "actually" the debtor's property. The U.S. District Court had previously concluded that, because the debtor's claim of ownership in the property was subsequently held to be without merit, the creditor's foreclosure sale of the property without first obtaining a modification of the automatic stay did not violate the stay. However, Brown v. Chestnut stands for the proposition that, where the merits of the debtor's ownership claim have not yet been resolved at the time of foreclosure, the risk of damage to the debtor's estate was sufficient to require the creditor to seek a modification of the automatic stay before proceeding with foreclosure.

In short, tread carefully when confronted with an argument that the automatic stay enjoins an intended action. Getting the stay modified to allow an action against property is usually simpler and more efficient than defending the cloud on title to the property that results from an assertion that an action taken without Bankruptcy Court approval violated the automatic stay.

Posted by Tom at 6:39 AM | Comments (0) |

Justice Breyer takes on the Originalists

This Wall Street Journal ($) book review previews U.S. Supreme Court Justice Stephen Breyer's soon-to-be-published book, Active Liberty: Interpreting Our Democratic Constitution (Knopf Sept. 2005) in which Justice Breyer offers a rejoinder to his longtime intellectual opponent on the Supreme Court, Justice Antonin Scalia, who advocates "originalism" - i.e., a more literal interpretation of the Constitution's meaning at the time of its writing. Justice Scalia's views were set forth in his book, A Matter of Interpretation: Federal Courts and the Law (Princeton Univ. Press 1997).

In the book, Justice Breyer advances the longstanding criticism that originalism is simply a self-righteous political cover for the fact that all Supreme Court justices, regardless of their judicial philosophy, rely on common elements such as "language, history, tradition, precedent, purpose and consequence" when interpreting laws. It's the way in which they afford different weight to each factor, contends Justice Breyer, that often has a monumental impact on the American republic.

Justice Breyer's view does have merit, as the entire originalist rationale has a questionable historical basis (the Founding Fathers had widely divergent views on the Constitution and the role of the judiciary) and certainly does not always lead to a coherent uniform approach to resolving cases. However, even though some of the originalist-based decisions have had the consequence of enlarging the governmental bureaucracies and divesting local communities of control, my sense is that Justice Breyer's approach is still more likely to result in debacles such as this.

Update: Jim Lindgren over at the Volokh Conspiracy speculates as to the source of Justice Breyer's theory.

Posted by Tom at 4:54 AM | Comments (3) |

Evaluating the true risk of Vioxx

At the start of the recent Merck/Vioxx trial, this post noted the dearth of clinical evidence that Vioxx was a particularly risky drug.

In light of last week's big verdict in the case, long-time Clear Thinkers favorite James D. Hamilton (prior posts here) evaluates one of the recent clinical studies on Vioxx and explains the study's statistical basis for the conclusion that there is a slightly elevated risk of heart attack for certain Vioxx users. Professor Hamilton then juxtaposes the following question against one of plaintiff's lawyer Mark Lanier's more disingenuous questions during the trial:

How did we arrive at a system in which 12 random Texans are assigned responsibility for evaluating the scientific merits of statistical evidence of this type, weighing the costs and benefits, and potentially sending a productive blue-chip American company into bankruptcy protection?

Posted by Tom at 4:22 AM | Comments (2) |

August 22, 2005

Best line of the weekend

Best crack of the weekend came from CBS Golf on-course commentator, Irishman David Feherty, during the final round of the NEC Golf Championship, discussing Irish golfer Paul McGinley's background as a Gaelic football player:

"Gaelic football? Now, that's one tough sport. Just one rule: No homicide."

Posted by Tom at 5:22 AM | Comments (2) |

August 21, 2005

Judge Roberts opinion archive

Genie Tyburski via Tom Mighell passes along this AskSam website that provides a well-categorized database of the opinions of U.S. Supreme Court nominee, D.C. Circuit Judge John G. Roberts (prior posts here).

By the way, Tom is the grand-daddy of Texas blawgers and his legal research and technology blog -- InterAlia -- reached its three year milestone this past week. Tom's blog is a phenomenal resource for anyone involved or interested in legal research, and Tom is one of the pioneers in redefining the way in which high-quality, specialized information is delivered to large numbers of people through the blawgosphere. Congratulations to Tom for a job well done and keep up the good work!

By the way II, in case you missed it on television, go over to the Comedy Central website, scroll down and watch the "Judge Report" video clip from the Daily Show, in which Jon Stewart cleverly excoriates the NARAL over its now infamous ad against Judge Roberts. It's absolutely hilarious.

Posted by Tom at 11:20 AM | Comments (1) |

Posner v. the Media

Three weeks ago, 7th Circuit Judge Richard Posner (prior posts here) penned this "review" of eight books on the media in the NY Times Review of Books. "Review" is in parenthesis because the piece was not so much a review of the eight books as a forum for Judge Posner to pass along his always entertaining views, this time on the media in America. Among his many observations, Judge Posner discounted the ability of even conscientious reporters and editors to put their personal beliefs aside to generate fair and honest journalism.

Well, in an interesting development, New York Times executive editor Bill Keller has written this Letter to the Editor (scroll down to the second letter) of his own newspaper in which he harshly criticizes Judge Posner's article on the media as, among other things, "tendentious and cynical." Bill Moyers and Eric Alterman also chime in. Finally, Dean Velvel provides this more extensive analysis on Judge Posner's article, and Professor Ribstein has an interesting view of the journalists' protective reaction to Judge Posner's criticism.

I look forward to Judge Posner's response, which will probably be published here.

Posted by Tom at 10:27 AM | Comments (0) |

Mark Lanier's next case?

This BBC article indicates that none other than Steve Jobs may be the next executive to be on the receiving end of the tort liability merry-go-round:

The surge in sales of iPods and other portable music players in recent years could mean many more people will develop hearing loss, experts fear.

Mark Lanier is licking his chops.

Posted by Tom at 7:27 AM | Comments (0) |

Piling on KPMG

As KPMG attempts to finalize a deferred prosectution agreement with federal prosecutors that would avoid an Arthur Andersen-type indictment and probable meltdown, now they have another front on the criminal battlefield to be worried about:

Mississippi likely will file criminal charges against accounting giant KPMG because it created a tax strategy the state says illegally let WorldCom, now called MCI Inc. shield billions of dollars from taxes, sources close to the case said on Friday.

Although a few other states have also weighed this strategy, Mississippi Attorney General Jim Hood is the most determined and his state would be the first to take this step, said the sources, who requested anonymity.

Under Mississippi law, "any person who willfully attempts in any manner to evade or defeat any tax . . . or assists in the evading of that tax or payment thereof" can be found guilty of a felony, one of the sources said. Penalties can be up to five years in prison, while fines can be as much as $500,000.

Analysts say Congress and corporate America would not want another of the nation's biggest accounting firms put out of business because the industry would be overly concentrated.

Mississippi might not share the federal government's concern that there could be too few auditors if KPMG collapsed, experts said, so KPMG might have less leverage in any talks with the state.

Hat tip to Ellen Podgor for the link to the Mississippi action.

Posted by Tom at 7:00 AM | Comments (0) |

August 20, 2005

Mayor White, hard-knuckled real estate speculator

Who would have thought when Bill White was elected that he would be spending a good amount of his time as Houston's mayor threatening to foreclose on downtown hotel properties?

Anne Linehan over at blogHouston.net reviews the entire sordid tale.

Note to Mayor White -- before you have the City foreclose its second lien on either of those hotel properties, please check to see whether either of them is generating enough revenue to pay operating expenses, much less debt service on the first lien indebtedness. Hotel properties "eat" money, and if the current owners are at least contributing enough to subsidize negative cash flows to operations, considering an alternative to foreclosure could save the City a ton of money. Sometimes you get more than you wish for when driving a hard bargain.

Posted by Tom at 11:07 AM | Comments (1) |

Dreaming of making "the Show"

George Will, who knows a bit about baseball, wrote this interesting column yesterday in the Washington Post in which he explores the South Atlantic Minor League Baseball League, otherwise know as "the Sally." The Sally is the hinterland of professional baseball, a low-A league in which the best players on their respective high school teams are evaluated to determine whether they have what it takes to move on to the next level of baseball's brutally efficient meritocracy. As Mr. Will notes:

The RiverDogs play 140 games in 151 days, traveling by bus, living at least two to a room in motels, some earning as little as $1,050 a month -- and only during the season -- with a $20 per diem for food. "Sometimes," says a player touchingly grateful for life's little blessings, "the motel is near an Outback." A young man from west Texas says, "I had a brother working in the oil fields. So if I wake up tired one day, I think, 'I could be doing that.' " Most of today's Sally Leaguers will be doing something like that sooner than they can bring themselves to imagine. But for now they are delighting some of the 40 million fans who will see minor league baseball this summer.

About 40 percent of the players on the 40-man rosters of the 30 major league clubs each spring are Sally League alumni, including, last April, Derek Jeter, Curt Schilling, Ivan Rodriguez, Luis Gonzalez, Scott Rolen, Andruw Jones and John Smoltz. But nowhere near 40 percent of Sally League players get to the majors. Most were the best on their high school teams and are slow -- mercifully so -- to understand the severity of professional baseball's meritocracy.

If you are interested in baseball, read the entire article. By the way, the Stros' farm team in the Sally is the Lexington Legends ball club. Hat tip to Phil Miller over at the Sports Economist for the link to Mr. Will's column.

Posted by Tom at 7:52 AM | Comments (0) |

August 19, 2005

Merck gets hammered

As anticipated by this prior post, a Brazoria County jury found that Merck & Co. was liable for $253 million in damages ($24 million in actual damages, plus $229 million in punitive damages) as a result of its negligence in the death of a 59-year-old Robert Ernst, who at the time of death was taking Merck's prescription painkiller Vioxx that over 20 million Americans took regularly before it was pulled from the market last year over concern that it might cause increased risk of strokes and heart attacks. The prior posts on the Merck/Vioxx trial are here, here, and here.

Inasmuch as Merck is currently facing another 4,200 Vioxx lawsuits, the verdict is not exactly a rousing start for Merck in the defense of the lawsuits. Merck's defense in the lawsuit seemed to be reasonably strong -- that is, Mr. Ernst, who had only taken Vioxx for eight months, died of arrhythmia that Vioxx has not been shown to cause. However, the Brazoria County coroner testified -- over Merck's strenuous objection because of the plaintiff's failure to designate the coroner as an expert prior to trial -- that Mr. Ernst's arrhythmia could have been caused by a heart attack. That testimony seemed to hurt Merck badly, as the Chronicle interviewed an alternate juror who had been dismissed from the trial immediately before deliberations began who remarked that Merck "wasn't doing the right thing by marketing the drug the way they were." Plaintiff's lawyer Mark Lanier accused Merck of dragging its feet after the Food and Drug Administration told it in late 2001 to put a label on Vioxx warning of potential heart risks, and during closing arguments, Mr. Lanier contended that Merck saved $229 million by waiting months to add the warning label. Not surprisingly, that's the amount of of punitive damages awarded by the jury.

Estimates of Merck's potential liability in the Vioxx cases range from $4 billion to $20 billion, which could be as large as a third of Merck's market capitalization. Although the price of Merck's shares dropped 8% today on the news of the verdict, that's not as bad as the 25% plus decline that occurred last September on the day Merck withdrew Vioxx from the market. Moreover, media reports on the jury's verdict have not differentiated between the plaintiff's economic and non-economic damages, but that distinction will be important to Merck's ultimate liability in this case when the court applies Texas' statutory cap on punitive damages to the jury verdict. You can be reasonably certain that the ultimate amount recovered will be far less than the jury verdict. Given that, and in view of the fact that Brazoria County is going to be one of the more plaintiff-friendly jurisdictions for a Vioxx trial, the market may be overreacting a bit to the verdict, although that's about the best spin that Merck can put on this result.

As usual, Professor Ribstein has insightful comments on the absurdity of all this, as does Ted Frank, Professor Bainbridge, Kevin M.D., Derek Lowe, Jonathon Wilson, and Walter Olsen.

Posted by Tom at 5:31 PM | Comments (8) |

To file or not to file? That is the question.

The Wired GC -- which is an excellent blog resource for any attorney who is, or advises, a general counsel of a company -- has this interesting post today about the tough decisions that some currently troubled companies currently have regarding whether they should risk a delay in filing a reorganization case under chapter 11 until after the new Bankruptcy Code Amendments of 2005 go into effect on October 17. The Wired GC also points to this handy summary by Lorraine S. McGowen of the Orrick firm regarding the changes in chapter 11 practice that will result from the amendments.

My sense is that the October 17 effective date will generate a few more reorganizations than normal over the next couple of months, but not that many. Certainly, if a company knows that a chapter 11 filing is inevitable in the near future, then filing a case sooner rather than later makes sense in light of the impending changes to the Bankruptcy Code. However, management of even the most financially-challenged companies rarely believe that bankruptcy is inevitable, so most companies will take their chances with filing under the amended Bankruptcy Code, if necessary. Finally, the Wired GC speculates that the effect of the new amendments may be to increase the number of reorganizations that end up in liquidation, which -- as we have seen in regard to the legacy airlines -- may not be all that bad a thing.

Posted by Tom at 10:29 AM | Comments (0) |

But what about Jamie Olis?

Doug Berman points out that Thursday was a busy day in New Orleans as the Fifth Circuit Court of Appeals issued over 160 published and unpublished decisions that appear mostly to involve rejection of various Booker sentencing claims. It's safe to say that the release of that many decisions sets a federal appellate record for the number of opinions issued by a court on one day.

Lost amidst all that activity, however, is the fact that the Fifth Circuit still has not ruled on the appeal in the sad case of Jamie Olis, even though oral argument in that appeal occurred on January 30 of this year. And while that appeal has been pending, Mr. Olis has been moved -- due to the absurd length of his 24 year sentence -- from a minimum-security prison in Bastrop, Texas to a medium-security prison at Oakdale, La., where prison gangs are common and many prisoners are serving multiple life sentences.

The Fifth Circuit's reputation in business cases took a serious hit with its Arthur Andersen decision, which was resoundingly rejected by a unanimous Supreme Court earlier this year. The Fifth Circuit has an opportunity to begin redeeming its reputation in business cases in the Olis appeal, but justice delayed is often justice denied. Here's hoping that a decision in the Olis appeal is forthcoming any day now.

Posted by Tom at 7:20 AM | Comments (4) |

Definitely not drinking buddies

Various PGA Tour officials are scrambling today to make sure that recently-crowned PGA Tournament Champion Phil Mickelson is not paired to play with Australian journeyman and PGA Tour player Paul Gow after Gow had this to say during an Austrailian radio interview earlier this week about his fellow Tour players' opinion of Mickelson:

"They wouldn't feed him. He ignores the other players. He's an arrogant person. He's the opposite - what you see on television is totally different to what he is around the clubhouse. And Tiger is the opposite - he will talk to you, he will sit down next to you at lunch and ask about your family and stuff. Phil is the opposite. He has done some great acting classes in Hollywood and they've worked out for him."

Posted by Tom at 6:55 AM | Comments (0) |

Is the noose tightening in the investigation of the Brown Administration?

The Chronicle's Dan Feldstein continues his solid coverage of the Cleveland, Ohio corruption trial of Cleveland entreprenuer Nate Gray, who is the person from whom two former Houston officials -- Lee Brown Administration chief of staff Oliver Spellman and building services director Monique McGilbra -- testified that they took cash and gifts. A previous trial of Mr. Gray ended in a mistrial, and the retrial that resulted in the conviction began earlier this month. Earlier posts on the trial and the related investigation of Brown Adminsitration officials are here, here, here and here.

Mr. Feldstein sums up what the result of this trial means to the Houston part of the ongoing criminal investigation:

In Houston, the question is this: What did it mean when a federal prosecutor asked FBI agent R. Michael Massie on the witness stand whether the investigation was finished in Houston and Massie testified, "No"?

McGilbra admitted she took favors from five companies. Mayor Brown's brother, Earl, was a "subconsultant" to Gray on Houston matters. Gray paid him to talk to Mayor Brown on behalf of his company, which was seeking a shuttle bus subcontract at Bush Intercontinental Airport.

Although he was not a registered lobbyist as would be required, Earl Brown said he did [talk to Mayor Brown]. Former Mayor Lee Brown has denied it.

McGilbra and Spellman are scheduled to be sentenced here in Houston on their plea deals on September 2nd.

Posted by Tom at 6:13 AM | Comments (0) |

An economist's marriage proposal

NBC News correspondent Andrea Mitchell is a part of one of Washington's most formidable power couples through her marriage to Federal Reserve Chairman Alan Greenspan. Asked during a Time magazine/CNN.com interview this past week as to whether Mr. Greenspan ever engaged at home in "Greenspeak" -- i.e., the art of ambiguous economic pronouncements -- Ms. Mitchell observed:

"Occasionally. In fact, he claims he proposed three times before I was able to understand. He was so oblique."

Posted by Tom at 5:40 AM | Comments (0) |

The Banks and KPMG

Following on this post from last week regarding a plea deal of a former banker who had promoted KPMG's tax shelters, this Wall Street Journal ($) article provides more information on the involvement of several banks -- namely UBS AG, Deutsche Bank AG and HVB Group -- in providing billions of dollars in credit lines to KPMG clients -- and, in turn, earning substantial bank fees -- in connection with KPMG's promotions of tax shelters to its clients.

According to the WSJ article, Deutsche Bank, which happens to be a KPMG audit client, earned almost $80 million in bank fees from the Opis and Blips transactions that are at the heart of the questionable tax shelter vehicles. HVB, which is also a KPMG audit client, earned 5.5 million on Blips transactions in just three months during 1999 and millions more in 2000. UBS participated in 100 to 150 transactions in 1997-1998, but the amount of UBS' fees are unclear.

Interestingly, the article points out that Deutsche Bank lawyers cautioned the company's bankers that Blips transactions posed substantial risks for the bank's reputation. Nevertheless, the CEO of Deutsche Bank's U.S. unit at the time approved the bank's participation in the transactions so long as "any customer found to be in litigation be excluded from the product . . . and that a low profile be kept on these transactions."

I think it's safe to say that the low profile has been blown.

Posted by Tom at 5:17 AM | Comments (0) |

Coudert Brothers kaput

Coudert Brothers LLP, one of the oldest big U.S. law firms, elected to disband yesterday in a vote of its partners. The firm will remain in business as its lawyers move on to new jobs.

The firm was established in New York in 1853 and has long had international offices and clients. It was one of the first U.S. law firms to open offices in Paris, London, Hong Kong and other foreign locales, and it still has 17 offices in Europe and Asia. Nevertheless, in recent years, Coudert had seen many of its top partners cherry-picked by competitors, and merger negotiations with several firms over the past two years had been difficult because of Coudert's inferior profitability compared with the prospective merger partners. Thus, the partners apparently concluded that a liquidation held more value for owners than a bad merger.

Now, if only this process could occur with regard to a few legacy airlines . . .

Posted by Tom at 4:55 AM | Comments (0) |

August 18, 2005

KPMG rumbles with the McNair boys

This NY Times article has the skinny on the slobberknocking litigation that is taking place between harried but feisty KPMG and R. Cary and D. Calhoun McNair, sons of Houston Texans' owner Bob McNair, over tax shelters that KPMG allegedly promoted to the McNairs back in 1999.

KPMG is walking a fine line in this lawsuit and numerous other civil lawsuits that have arisen over the firm's former clients having problems with the IRS over claiming deductions for shelters that the IRS ultimately determined were abusive. Inasmuch as KPMG has already conceded that certain of its tax partners engaged in "unlawful conduct" in creating and selling the tax shelters, KPMG now has to juggle the dueling positions of being contrite while attempting to avoid a criminal indictment through negotiation of a deferred-prosecution agreement while fighting similar allegations in civil lawsuits with former clients to avoid potentially huge damage awards that could also sink the firm.

In the McNair lawsuit, KPMG is asserting that the McNairs knew fully well what they were getting into with regard to the tax shelter when they filed their returns. Consequently, KPMG is attempting to discover information about advice that the McNairs' tax lawyers and investment advisers gave them in connection with filing the returns. In that regard, KPMG is also asserting that the lawyers and the advisers are responsible third parties for at least a portion of the damage award if the firm is found to be liable to the McNairs.

These lawsuits in which both sides are alleging that one is worse than the other in regard to the alleged wrongful conduct are among the dirtiest lawsuits imaginable. My sense is that KPMG would not normally ever allow this type of lawsuit to go to trial because of the risk that a jury would really lay the wood to KPMG for not only giving dubious tax advice on the shelters to the plaintiffs, but also for throwing dirt at the plaintiffs and their advisors. However, KPMG is in a highly difficult position these days, and the precedent of a large settlement in a case such as this may not be consistent with the firm's plan for survival as a going concern. Therefore, KPMG may figure that it does not have much to lose by taking the case to trial because of the high risk that the firm will liquidate if it is hit with substantial damage awards in the large number of similar cases. If that is the case, the trial of this one could be very interesting -- I've always advised clients to be very wary of litigating with a party that has little or nothing to lose.

Peter Henning also has interesting observations on the case.

Posted by Tom at 12:41 PM | Comments (0) |

The latest Dome redevelopment plan

Following on these earlier posts (here and here), this Chronicle story reports that an outfit named Astrodome Redevelopment Corp. has obtained a preliminary $450 million financing commitment to redevelop the Astrodome into a Gaylord Texan-type hotel and entertainment complex. Astrodome Redevelopment Corp. is an investment company comprised of Oceaneering International Inc., a publicly traded firm working in engineering, science and technology; URS, a large architectural and design firm; NBGS International, a theme park developer; and Falcon's Treehouse, a Florida-based design firm.

Emphasis here should be on the word "preliminary." A project of this magnitude would entail working out huge problems, such as how an additional 1,200 rooms can be justified to lenders and equity investors in light of Houston's current glut of hotel rooms, parking woes during football games and the Houston Livestock Show and Rodeo, and the dubious nature of the pitiful Astroworld Six Flags Amusement Park across the freeway from the Dome as a draw for the hotel. As a result, my sense is that this deal will never come together, but crazier financial decision have been made -- just look at the Metro Light Rail line! ;^)

Anne Linehan over at blogHouston.net summarizes local reaction to this latest Dome boondoggle.

Posted by Tom at 10:32 AM | Comments (2) |

More on when justice destroys good reputations

This post from awhile back noted one of the by-products of the current trend toward criminalizing merely questionable business transactions -- i.e., the government's destruction of good reputations in its quest to obtain convictions against unpopular defendants.

Along those lines, this U.S.A. Today article from yesterday catches up with Mark Belnick, the former Paul Weiss partner and Tyco general counsel who was indicted and acquitted in connection with the prosecutions of former Tyco executives after he had coordinated the company's cooperation with the criminal investigation of former Tyco executives Dennis Kozlowski and Mark Swartz. Here is a longer New York Magazine article on Mr. Belnick's ordeal.

In the article, Mr. Belnick discusses with the reporter the misery that he endured during a prosecution that was based upon grand larceny charges for compensation that was Tyco's CEO and CFO indisputably approved:

"When I was threatened with grand larceny, I thought, 'What did I steal — my stock bonus?' " says Belnick. "I didn't even understand what the theory of grand larceny could be here."

During the trial, the prosecution described Belnick as a "man who lost his moral compass" and accepted excessive compensation that he knew was a payoff for his silence about wrongdoing committed by Messrs. Kozlowski and Swartz. This, of course, after the same prosecutor had received Mr. Belnick's assistance in uncovering the alleged wrongdoing by Messrs. Kozlowski and Swartz.

So it goes in the continuing criminalization of agency costs.

Posted by Tom at 9:38 AM | Comments (2) |

Review of the Tournament Course at Redstone Golf Club

As noted in this previous post, the Rees Jones-designed Tournament Course at Houston's Redstone Golf Club opened for play earlier this month to generally positive reviews. The Tournament Course -- the new specially-designed home of the Shell Houston Open PGA Tour Golf Tournament -- is the latest step in the Houston Golf Association's efforts to revive the lagging event, which relocated to Redstone three years ago after a spectacularly successful 28 year run in The Woodlands, primarily at the Tournament (formerly the TPC) Course.

Several days ago, three pals and I teed it up at the Tournament Course for the first time. Although we should have had our heads examined, we decided -- in order to get the full flavor of the course -- that we would walk the course with caddies (in 95 degree temperature with 90% humidity!) and play the course from the tournament (i.e., the longest) tees. Inasmuch as the ground was still quite wet from a heavy rain storm the previous afternoon, we received no roll on our drives and felt like we trudged every one of the 7,500 yards of the course. Despite the challenging conditions, we had a jolly good time, and the following is my report (with photographs) on the newest addition to the generally underrated family of Houston championship golf courses.

Overall, the Tournament Course is an outstanding addition to the Houston golf scene. It is already a very good golf course, and has a chance to become a truly superior one. At this point, I would give the course a strong B+, but my sense is that the Houston Golf Association -- which did a wonderful job refining The TPC Course in The Woodlands over the years -- will make the improvements and modifications necessary to elevate the Tournament Course to one of the best golf courses in Houston and Texas. A strong golf course will not be enough alone to attract the best professional golfers back to the Shell Houston Open (a more favorable date help even more), but a strong course is a necessary component of a successful event, and the Tournament Course is certainly a good start to fulfiling that need.

Interestingly, despite its prodigious length, the Tournament Course is not simply a long course. It starts out with three relatively short, wide-open par 4's before it begins to bear its teeth on a couple of par 4's (holes five and six) midway through the front nine. In fact, four of the ten par 4's on the course are under 400 yards, which is almost unheard in these days of increasingly long tracts.

The course requires a variety of shots, and the greens (Mini-Verdie grass, very good condition) are well-adapted for the particular holes -- relatively flat and receptive for the longer holes, but quite undulating for the shorter ones. As with the TPC Course, the Tournament Course bears its teeth on its final two holes, the brutal 487 yard (uphill!) par 4 and the beautiful 485 yard par 4 18th that bends in and out of a lake that runs along the left side. Combine those two holes with the 200 yard par 3 sixteenth and you have a group of finishing holes that will take a back seat to few others in terms of difficulty. The course has a stout 138 slope rating from the tournament tees, and the 132 slope rating from the next set of tees up from the tournament tees is comparable to the tips at several very good Houston-area courses, such as Lochinvar Golf Club.

Despite the wet condition of the course when we played, the turf conditions on the Tournament Course are generally good with the exception of the 15th hole, where the fairway has simply not grown in well. The rough is already quite thick in most places and will be truly troublesome when the HGA allows it to grow for tournament conditions. Somewhat surprisingly, Redstone and the HGA elected not to use the sandcapping process on the fairways of the course, which has been been a big success at Carlton Woods Golf Club in expediting the return of the course to playability after heavy rains (a common occurrence in Houston generally and during Shell Houston Open week, in particular). The course is generally easy to walk, although there are long walks required between the green of the 1st hole and the 2nd tee, the 9th green (which is not near the clubhouse) and the 10th tee, and the green of the 17th hole and the 18th tee (where is a Metro light rail line when you really need one?). In my view, those long walks detract much from the otherwise attractive ambiance of the course.

The course is not as spectator-friendly as the TPC Course, but there are several wide open areas (particularly on holes 1, 17 and 18) and a huge practice area that will accomodate large numbers of spectators. The HGA will probably make gradual modifications to the course that will make it better for spectators than either Champions Cypress Creek (which has hosted several PGA Tour events) or the Jacobsen-Hardy Course at Redstone that has hosted the Shell Houston Open for the past three years. As with Lochinvar and Whispering Pines Golf Club, the Tournament Course is a relatively rare Houston championship course that is not built into a subdivision, so the scenery on the course will not be disrupted over time with the development of home sites. Finally, Redstone is very proud of the course as their $135 green fee (including cart) reflects, but this is the type of course that one plays only on special occasions, so Redstone will probably have a steady stream of customers even at that relatively high price.

Driving the ball well from the tournament tees, this 8 handicapper shot an 85 on the Tournament Course, which is about as well as I could have played it. I'm looking forward to playing the course again when it's a bit drier and not 90/90 in terms of temperature and humidity, and certainly not from the tournament tees. Nevertheless, I give the Tournament Course at Redstone a strong thumb's up, so take the time to check it out in the near future.

Posted by Tom at 4:15 AM | Comments (5) |

August 17, 2005

More on criminalizing risk taking

Vic Fleischer over at the Conglemerate blog continues his campaign to increase the business of the white collar criminal defense bar with a couple of posts (here and here) in which he suggests that "financial engineering" of the type that KPMG was involved with in regard to its tax shelters should be criminalized. Vic differentiates such financial engineering from transaction cost engineering, which creates value by reallocating risk and, in Vic's world, is just fine. Vic's theory is really just an extension of one that was propounded by former Enron Task Force prosecutor-turned-law professor John Kroger in a law review article, Enron, Fraud and Securities Reform: An Enron Prosecutor's Perspective.

Vic's theory is a classic example of one that sounds somewhat appealing in theory but is a prescription for injustice in practice. As we saw in the previous Nigerian Barge case thread, implementation of Vic's theory resulted in the conviction of four Merrill Lynch executives -- among the dozens of Merrill executives who reviewed the deal -- for doing their jobs in connection with Merrill's purchase of a dividend stream that Enron, not Merrill, may have improperly accounted for, although even that issue has never really been proven. The give-and-take in that thread alone should establish that reasonable doubt exists as to the government's charges against the Merrill defendants, and that fact is reflected by the lengths to which the government must go in order to obtain convictions. The Enron-related prosecutions have been rife with prosecutorial abuse, including the chilling of dozens of witnesses favorable to the defense and, in the Nigerian Barge case, dramatic prosecutorial statements to the jury that Merrill's involvement in the relatively small deal played a meaningful part in Enron's downfall.

Moreover, the transparent nature of Vic's theory is even better reflected in the hypothetical case. Say a banker makes a much-needed loan to a longtime business customer that is clearly headed toward bankruptcy. The loan increased the amount of the bank's lien on the debtor's assets to the detriment of the debtor's other creditors. There was no transaction cost engineering -- it was clear that the debtor was going down the tubes and the loan would only delay the inevitable. There certainly is a financial engineering component to the loan because the value of other creditors's claims are diluted as a result of the transaction. In the hands of a crafty prosecutor, such a transaction would easily fall under Vic's definition of financial engineering that would call for a prosecution of the banker and the business owner. Indeed, under Vic's theory, almost any set of circumstances that would give rise to an equitable subordination claim against a creditor in a bankruptcy case would serve as the basis for a criminal indictment. Does anyone really believe that American business interests could "stand upright in the winds" of abusive state power that would blow if such transactions were to be criminalized?

Larry Ribstein dissects Vic's latest post and, in so doing, notes the following:

I'm concerned that the criterion is political rather than the social policies that should determine criminalization, . . . For example, based on the government's indictment, did Ken Lay, who was basically out of the picture until the very end at Enron, do more harm to the the public and engage in conduct that was more obviously culpable than the principals at Krispy Kreme? I don't know, but I do know that a government agency doesn't get the same goodies from going after a donut maker that it does from going after these people in Houston who have had movies made about them. When indictment decisions depend on considerations like that, it starts to look like a lottery, at least from the defendants' standpoint. . .

The difference is a matter of degree, but it's a degree that matters. I don't think that corporate conduct is getting worse. But the politicization of the corporation has increased, helped along by the media, in the wake of Enron. We need to take a hard look at what's going on and make sure that it's really crimes and not politics that is landing people in jail and putting whole organizations out of business.

Indeed, even something as indiscriminate as having good timing in going bust can determine whether one goes to jail these days.

Posted by Tom at 7:17 AM | Comments (1) |

Trouble at SCI?

Houston-based funeral and cemetary operater Service Corporation International notified investors and federal regulators yesterday that it plans to delay its second-quarter earnings report to finish an accounting review involving 430,000 prepaid funeral services. The company said that it expects the delay to be about 10 days and it will file the second-quarter report shortly thereafter.

The company said it could have to restate financial reports for the first quarter of 2005, each of the four quarters of 2004 and 2003, and each of the fiscal years that ended Dec. 31, 2000 through 2004. The adjustments so far total $7.5 million, which -- if those are the only adjustments -- are not materially adverse for a company the size of SCI.

Posted by Tom at 5:35 AM | Comments (0) |

Holman Jenkins on the corporate case of the decade

Don't miss Wall Street Journal ($) columnist Holman Jenkins' analysis of the decision in the Disney case, which includes the following broadside at Disney CEO Michael Eisner:

Mr. Ovitz may be as disagreeable a personality as some press accounts insist. But the accusations leveled against him by Disney's CEO ("psychopath," "liar," "incompetent"), which were demonstrably intended to be conveyed to the press, might more readily apply to Mr. Eisner himself.

Posted by Tom at 5:06 AM | Comments (0) |

Two banks settle Enron bankruptcy estate claims

J.P. Morgan Chase & Co. and Toronto-Dominion Bank announced yesterday that they had agreed to pay about $420 million to settle their parts of the "Megaclaims" lawsuit that the Enron bankruptcy estate filed against 10 banks for allegedly aiding and abetting accounting fraud that Enron alleged prompted the company's collapse into chapter 11 at the end of 2001. Morgan Chase will pay $350 million of the total and Toronto-Dominion the balance.

Three other banks have already settled the Megaclaims litigation, so with the most recent settlements the aggregate amount of settlements in the litigation is approaching three quarters of a billion dollars for the Enron bankruptcy estate. The settling banks have also agreed to waive claims against the Enron estate in an aggregate amount in excess of $3 billion. The five banks that remain in the Megaclaims litigation are Citigroup Inc., Credit Suisse Group's Credit Suisse First Boston Inc., Deutsche Bank AG, Merrill Lynch & Co. and Barclays PLC.

The Megaclaims litigation is seperate from the Enron securities fraud class action case against the same banks that is pending in Houston and has already resulted in settlements in excess of $7 billion. Frankly, compared to the amounts that the settling banks have paid to date in that litigation, the amounts being paid to settle the Megaclaims litigation are practically nuisance value.

Posted by Tom at 4:39 AM | Comments (0) |

August 16, 2005

Ebert's most-hated films

Movie critic Roger Ebert has posted this "most-hated movies" column on his website, and it's an entertaining read. Inasmuch as I have been spared the chore of watching most of the films noted, it's hard to argue with his choices. However, even though it has been overrated generally, isn't it a bit harsh to include The Usual Suspects on this list?

Posted by Tom at 6:32 AM | Comments (2) |

Reliant settles with California utilities

The highly-publicized lawsuits by California-based utilities against Houston-based Reliant Energy Inc. over allegations that Reliant pumped up trade volumes and revenues during the 2000-01 energy crisis in Western states died with a whimper yesterday as Reliant agreed to pay $150 million cash and waive another $300 million in claims to settle the utilities' lawsuits.

The agreement ends investigations conducted by attorneys general in California, Washington and Oregon and all civil litigation filed by the California Attorney General's Office, including a pending antitrust lawsuit. The agreement comes just weeks after Reliant agreed to settle all shareholder class-action lawsuits relating to the power crisis for about $68 million. Previous posts here and here report on criminal indictments relating to this civil litigation.

Reliant did not admit to any liability and there were no court findings of any violations of securities laws. The various lawsuits and investigations against Reliant focused on allegations that Reliant failed to disclose certain trading activities from 1999 to 2001 that took advantage of the Western power shortage at that time to pump up Reliant's revenues. The various lawsuits claimed damages in the billions; the settlement amount that Reliant will pay is a fraction of the amount of those claims. Given the size of those claims and the highly-charged publicity surrounding them, the settlement is a clear victory for Reliant despite the self-serving statements of California politicians taking credit from protecting California residents.

Posted by Tom at 5:10 AM | Comments (0) |

Important substantive consolidation decision

The Third Circuit Court of Appeals issued this decision yesterday in connection with the Owen Cornings chapter 11 case in which it reversed a bankruptcy court decision that substantively consolidated Owens Corning and its numerous units as one entity for purposes of confirming the company's reorganization plan.

Substantive consolidation in large reorganization cases is a favored tactic of tort claimants (it was favored by asbestos claimants in the Owens Corning case) and creditors of a company's unprofitable units that allows those creditors to share in distributions generated from the company's more profitable units. Lenders to those profitable units generally balk at substantive consolidation because it dilutes the dividend that they would otherwise receive on their claims against the profitable unit by allowing the claims against the unprofitable units to share in distributions from the profitable unit. In the Owens Corning case, the Third Circuit's decision is a victory for a group of banks led by Credit Suisse Group's Credit Suisse First Boston that has hundreds of millions of dollars riding on the separation of Owens Corning from its more profitable units.

Owens Corning is a large manufacturer of building materials that filed a chapter 11 case in 2000 to resolve the risk of huge unliquidated asbestos-related personal-injury claims. However, some of Owens Corning's most profitable units did not file their own chapter 11 case. Accordingly, the effect of the Third Circuit's decision is that the lenders to those more profitable units will be able to claim superior distribution rights over those of tort claimants from the assets of the profitable subsidiaries, leaving the tort claimants and other creditors of the parent company to fight over the diminished assets of the parent.

Substantive consolidation was also recently used in the Enron Corp. chapter 11 case in connection with confirmation of the reorganization plan in that case. The tactic was opposed by creditors of certain of Enron's more profitable units and, as I recall, the Bankruptcy Court's decision overruling those objections was appealed. Thus, you can bet that the Third Circuit's decision is being studied this morning by lawyers involved in the Enron case to determine the possible impact on the Enron reorganization plan.

Posted by Tom at 4:41 AM | Comments (0) |

August 15, 2005

Stros 2005 Review: Player myths and the Stros' playoff chances

The bloom is officially off the Stros' (63-54) streak after the lowly Pirates (51-67) took two out of three from the Stros over the weekend, including the last two in which the Stros could not manage a run. Ouch!

Thus, after getting back into the NL Wild Card playoff race with a 41-14 streak, the Stros are now 7-10 over their last 17 games. Unfortunately, that latter stretch is more representative of this Stros club's ability-level. So, absent a late season acquisition of a strong hitter, it is not likely that this club will win the 27-30 games out of its last 45 that is probably necessary to clinch the Wild Card playoff spot.

The Stros continue to lead in the race for the NL Wild Card playoff spot, but the NL East teams that will probably overtake the Stros are gaining. The Phillies (63-55) and the Marlins (61-56) remain the strongest contenders, and the Nationals (62-55) continue to hang in the race although my sense is still that they will fade by Labor Day. Both the Cubs (57-61) and the Brewers (57-61) continue to fade from the race, although the Brewers are roughly as strong and certainly a better-balanced club than the Stros.

Combining each contending club's runs created against average ("RCAA", explained here) and its runs saved against average ("RSAA", explained here) is a good measure of each club's strength relative to the rest of the league, so here is how the clubs involved in the Wild Card race stack up:

Marlins 70 RCAA/1 RSAA = 71
Stros -21/79 = 58
Brewers 31/13 = 44
Mets 11/30 = 41 (59-58)
Phillies -32/58 = 26
Cubs 30/-14 = 16
Nationals -21/23 = 2

Thus, the Marlins remain the Stros' strongest competition, and their pitching appears to be coming around at the right time. The Mets are better-balanced than the Stros, but may not be dominant enough in either the hitting or pitching area to string together the winning streak necessary to contend for the Wild Card. The Phillies continue to contend with even worse hitting than the Stros, so they are a prime candidate to fall back in the face soon.

Here are the Stros hitters' individual RCAA through Saturday's games, courtesy of Lee Sinins:

Morgan Ensberg 39
Lance Berkman 19
Craig Biggio 12
Orlando Palmeiro 12
Jason Lane 2
Jeff Bagwell 1
Eric Bruntlett -4
Luke Scott -4
Todd Self -4
Humberto Quintero -6
Jose Vizcaino -6
Willy Taveras -8
Raul Chavez -10
Chris Burke -15
Adam Everett -16
Mike Lamb -16
Brad Ausmus -17

The Stros team RCAA of -21 remains 11th among the 16 National League clubs. The Stros hitters continue to be well under-average as a group, even with productive performances from Ensberg (39/.394/.599/.993), Berkman (19/.403/.486/.889), Bidg (12/.339/.475/.814), and Palmeiro (12/.388/.513/.900), and Jason Lane (2/.312/.497/.809)'s second half surge toward respectability. One of the Stros' biggest problems now appears to be Manager Phil Garner's incompetence, as he insists on giving substantial playing time to inferior players such as Taveras (-8/.333/.355/.688) and Burke (-15/.293/.304/.597). At this point in the season, there is no good reason to give substantial playing time to either Taveras or Burke in place of Palmeiro or Lane.

Which leads me to make an observation about Taveras, who is a good example of how many local media types (except for Charlie Pallilo, that is) and the Stros P.R. machine ignore facts in evaluating players. If you were to listen only to Milo Hamilton, then you would think Taveras is a viable Rookie-of-the-Year candidate and a sure-fire rising star as he is leading all MLB rookies in hits, batting average, games, singles, infield hits, bunt singles, and steals. And he may well be the Rookie-of-the-Year because the rookie class this season is relatively weak, and there is no question that Taveras has done a reasonably good job of making the difficult jump from Double A ball last season to the major leagues this season.

Nevertheless, Taveras is by no means a sure-fire star and -- in the best of worlds -- would have been better served by playing this season at Triple A Round Rock to work on his on-base percentage and slugging percentage. His lead in the above-described categories is nice, but a closer look shows that Taveras' performance leaves a lot to be desired. He's a below average hitter (-8 RCAA), a below average hitter for his position (CF) and thus, barely rates out as better than a replacement level player (i.e., the Stros would get about the same production from replacing Taveras with Eric Bruntlett (-4/.284/.425/.709). Taveras' lack of power, the mediocre on-base percentage for a top of the lineup hitter, and his 74 strikeouts versus only 17 walks all raise serious questions about his future potential. Although he is only 23 and thus could improve with more experience, Taveras should not currently be an everyday player on a club that also is playing weak hitters such as Brad Ausmus (-17/.334/.295/.630)and Adam Everett (-16/.287/.366/.653).

By the way, run scoring is down considerably for the Stros this year. Their 2005 runs scored per game (R/G) is down over 14% from the 2004 season and 12.2% from their average R/G of 2002-2004. MLB-wide run scoring in 2005 is down just 3.5% from 2004, and just 1.6% from the cumulative 2002-2004 period. Consequently, don't allow the Stros' nice streak earlier in the season fool you -- this club remains seriously hitting-deficient and needs to take bold steps in the off-season to bring in at least one far above-average hitter or at least two above-average hitters.

So, how have the Stros been able to overcome this abysmal hitting? Superior pitching can cover up a lot of warts, and the Stros have had outstanding pitching this season. Here are the Stros pitchers' individual RSAA through Saturday's games:

Roger Clemens 53
Roy Oswalt 33
Andy Pettitte 28
Dan Wheeler 14
Brad Lidge 10
Chad Qualls 4
Mike Gallo 3
Mike Burns 1
Chad Harville -3
John Franco -5
Russ Springer -7
Brandon Backe -10
Brandon Duckworth -12
Ezequiel Astacio -13
Wandy Rodriguez -17

The Stros team RSAA of 79 is 2nd among the 16 National League teams. Clemens (1st in NL RSAA), Oswalt (3rd in NL RSAA), and Pettitte (tied for 5th in NL RSAA) remain the strongest three starting pitchers on one team in MLB, while Lidge (despite a couple of blips over the weekend) and Wheeler are one of the strongest closing duos in the National League.

By the way, just to give you an idea of how good a level of pitching a club needs to overcome hitting as bad as this Stros team, Baseball Prospectus has a statistic called Runs Prevented (RP) that -- similar to RSAA -- measures how many runs a pitcher has kept from scoring relative to a league-average hurler throwing the same number of innings. If Clemens, Pettitte and Oswalt's combined performance so far this season holds through the end of the regular season, then that trio's combined RP total will be the best for three pitchers on one club in Major League Baseball history, better even than any season by the Braves' troika of Maddux, Smoltz and Glavine during their heyday of the late 1990's. Given that the Stros will certainly not win the NL Central with such superior starting pitching and may not make the playoffs at all, the foregoing is dispositive proof that this club needs a serious infusion of hitting talent to balance out a decidedly one-sided performance this season.

Finally, with this past Saturday night's gem, Clemens reached 50 RSAA for the 5th time in a season. He is third in that category since 1900:

1 Lefty Grove 9
2 Randy Johnson 7
3 Roger Clemens 5
T4 Walter Johnson 4
T4 Pedro Martinez 4
T4 Greg Maddux 4
T7 Carl Hubbell 3
T7 Dazzy Vance 3
T9 Juan Marichal 2
T9 Hal Newhouser 2
T9 Steve Carlton 2
T9 Bobo Newsom 2
T9 Cy Young 2 (8 times total)
T9 Lefty Gomez 2
T9 Grover C Alexander 2

The Chronicle is reporting today that Clemens will undergo an MRI this week to determine the cause of his increasingly sore back, so stay tuned on that front. If the Stros lose Clemens for any appreciable amount of time, then their playoff chances are officially toast.

The Stros continue their long homestand this week against the Cubs and then the Brewers before making another West Coast swing after next weekend. The Stros really need to take four out of their next six games to have any reasonable hope of maintaining their slim lead in the Wild Card playoff race.

Posted by Tom at 5:23 AM | Comments (3) |

August 14, 2005

The politics of Texas college football

If you are interested in college football, then don't miss the well-done series of articles in the by Mark Wangrin in today's San Antonio Express-News, The Great Texas Football Rebellion.

Mr. Wangrin does a nice job of recounting the details and intrigue behind the creation of the Big 12 Conference, including the parochial Texas politics that kept TCU and the University of Houston out of the conference and perennial doormat Baylor in.

Moreover, Mr. Wangrin tells the story about how the Texas schools -- particularly the University of Texas -- insisted upon more stringent entrance requirements for student-athletes in the new Big 12 Conference, which was a key development in the decline of Nebraska's football powerhouse. For decades, Big Red's program thrived in the Big 8 Conference on recruiting out-of-state players who did not meet many big school's entrance requirements, but who were able to meet NU's lenient entry requirements for football players -- remember Mike Rozier?. However, the leveling of entrance requirements in the Big 12 has slowed down the flow in the pipeline of out-of-state players to Nebraska, as the 5-6 record from last season (the worst since 1961) reflects. The most recent change in coaching staffs indicates that Nebraska is taking a different approach from the one that had been followed successfully for the past 45 years (indeed, it appears that arch-rival Oklahoma is the now the model for Nebraska's program), but it is still too early to say whether the Nebraska program can regain its stature among the elite college football programs.

Mr. Wangrin provides a wealth of background information on Texas college football and should be required reading for any fan of the collegiate gridiron. Check it out.

Posted by Tom at 8:50 PM | Comments (1) |

Elk on the advantages of being a Houstonian

One of my favorite professional golfers is fellow Houstonian and University of Houston alum Steve Elkington. Elk is just two shots out of the lead going into the final round of the PGA Golf Championship this weekend, and he noted one big advantage of living in Houston while responding to a media question on how he dealt with the stifling 109 degree heat index during his Saturday round at Baltusrol Golf Club in Springfield, New Jersey:

"Being Australian and living in Houston, I thought it was quite cool."

Posted by Tom at 12:20 PM | Comments (0) |

Analyzing the Harris County Jail problems

Earlier posts (here and here) have addressed the chronically abysmal condition of Houston's Harris County Jail. As noted in the posts, local politicians have an amazing propensity for blaming others rather than addressing the causes for an unpopular problem and resolving them in a responsible manner. Recently, the County Commissioners voted to throw some money at one of the symptoms of the jail's problems (i.e., serious overcrowding), but there still appears to be no meaningful action being taken on addressing why the jail's problems have continued to fester for decades.

Into that vacuum of action, Scott Henson over at Grits for Breakfast files this first in a series of posts that analyzes Harris County bail policies and their contribution to the jail's overcrowding. As Scott notes:

According to a recent consultant's report (download pdf), a major reason is clear: A shift in bail policy over the last decade to require cash bond in more cases instead of personal bond, or releasing defendants on their promise to later appear in court. Half of all inmates presently in the Harris County Jail are awaiting trial; a large proportion couldn't make bail.

Though other factors are also at play, much of the Harris County Jail's overincarceration crisis can be explained by this shift in policy. In other words, Harris County's jail overcrowding crisis is a self-inflicted wound.

Read Scott's entire piece, and his future posts on this issue will be noted. As noted in the previous posts, the horrid condition of the Harris County Jail is an embarrassing reflection of our community's values. This is a problem for which all Houstonians should unite and demand resolution once and for all.

Posted by Tom at 7:12 AM | Comments (2) |

The KPMG Memorandum

The KPMG tax shelter saga has been a common topic on this blog over the past year or so, and this recent post observed that -- even if KPMG fades a criminal indictment -- it is by no means clear that the firm will be able to survive the after-effects of entering into a deferred prosecution agreement to settle the criminal probe.

Along those lines, Peter Henning passes along this extraordinary open memorandum that nine anonymous (and frustrated) current and former KPMG partners recently sent to several media outlets, the Justice Department and the KPMG board. The memo describes in detail the demoralizing effects of KPMG management's moves to avoid a criminal indictment at all costs and the devastating impact that the Justice Department's criminalization of agency costs has had on KPMG. Indeed, the memo outlines a number of the adverse effects of criminalizing agency costs that have been noted here, such as the following:

Bludgeoning employees into plea bargains;

Criminalization of conduct that is not even clearly improper in a civil context -- much less criminal -- through "indictment via media" (also here);

Serving up sacrificial lambs and firing key partners who were simply doing their jobs;

The cost to owners of rolling over in the face of the investigation as opposed to standing up and fighting it; and

The high price of "cooperation" and the illusory attorney-client privilege.

Interestingly, the authors of the memo believe that KPMG can absorb the financial impact of a hefty fine and damage awards resulting from civil litigation over the tax shelters, but are less sanguine about the prospects for KPMG's survival because of the damage to partner morale resulting from management's handling of the tax shelter probe.

Posted by Tom at 6:30 AM | Comments (3) |

August 13, 2005

Barkley on golf

The TNT Network weekday coverage of the PGA Golf Championship was somewhat frustrating, as it basically followed Tiger Woods while he struggled to make the cut and then occasionally showed the players who are actually in contention. But then, out of the blue, the coverage was saved by none other than former NBA star Charles Barkley, who proceeded to provide a highly entertaining and funny interview about golf. Among Barkley's comments were the following:

As the coverage was showing Woods' reaction immediately after he had hit his ball into the water hazard on the 4th hole:

"Uh, oh, don't zoom in."

On his close friend Woods and the extremely hot weather during the tournament:

"It must be hot out there because Tiger is in great shape and he is sweating. When skinny people sweat, you know it's hot."

Answering a question on who is in better shape, Woods or Barkley?:

"Well he has a six pack and I have a keg . . . and I would never want to have just six beers."

On a revelation regarding his physical condition that he discovered while playing golf:

"I came to the realization a couple months ago that I am fat. If you get tired from walking - and that's all that golf is - then you are officially fat."

On Woods as a golf instructor:

"Tiger has spent numerous hours trying to work on my golf swing. He's not a very good teacher."

On his recent performance at the American Century Celebrity Championship in which he finished directly behind Cheryl Ladd and fellow NBA player Chris Webber:

"It's embarrassing. If you are a man and you can't beat girls or the smart kids, you shouldn't be playing . . . I'm retiring from golf. I'm not going to play again."

But as funny as the Barkely commentary was, he actually passed along some insightful observations, including the following one about the competition between Woods, Phil Mickelson and Vijay Singh, as noted by Damon Hack in this NY Times article:

Barkley compared Woods to Michael Jordan as the greatest of his generation, and golfers like Mickelson and Singh to basketball players like himself and Patrick Ewing - as Barkley put it, great players, but not the greatest.

"I think Phil Mickelson is the most talented golfer I've ever played with in my life," Barkley said. "But I've never seen any jock in any sport work harder than Tiger. If Phil worked as hard as Vijay and Tiger, it'd be like a flip-flop all the time. That's how talented I think Phil is. But if Phil wants to compete with Vijay and Tiger, he's going to have to take it to another level, workout-wise."

"I've said this about Phil before. Phil's so good, he just has to get out of his own way. And I've heard Joe Torre say that about A-Rod," referring to the Yankees' Alex Rodriguez. "It would really be scary if Phil were to work out as hard as Vijay and Tiger and practice as much. I would love to see that combination."

Hat tip to Geoff Shackelford for the link to Barkley's quotes.

Posted by Tom at 11:21 AM | Comments (0) |

Delta on the brink

This NY Times article reports that Delta Airlines is finalizing debtor-in-possession financing arrangements, which is a strong signal that the airline is likely to file a chapter 11 case in the near future.

Debtor-in-possession ("DIP") financing provides loans that a chapter 11 debtor taps immediately after the commencement of a chapter 11 reorganization to bridge the debtor's pre-bankruptcy financing arrangements with the financing that is ultimately approved under the debtor's confirmed reorganization plan under which the debtor emerges from chapter 11. The U.S. Bankruptcy Code provides several legal protections to induce lenders to provide DIP financing, so DIP financing -- particularly in big reorganization cases -- has become a quite lucrative area of the financing business that attracts a number of large lenders. Consequently, although it would at first seem somewhat counterintuitive in regard to a financially-strapped company such as Delta, there is probably quite a bit of competition going on within the DIP financing community for Delta's business in this area.

Posted by Tom at 7:44 AM | Comments (0) |

August 12, 2005

The effect of Sarbanes-Oxley on Krispy Kreme

This post from earlier this week addressed the wide-ranging negative effects of the Sarbanes-Oxley legislation that was supposed to curb and correct the corporate fraud that supposedly prompted the bursting of the stock market bubble earlier in the decade.

Meanwhile, Krispy Kreme's (previous posts here) board released earlier this week a summary of an internal investigation that detailed over $25 million in accounting errors and related management failures that occurred as the trendy company was rapidly expanding and fascinating investors. When rumors of those management failures became public last fall, Krispy Kreme's stock price tumbled.

Before enactment of Sarbanes-Oxley, revelations of such management failures would have almost certainly resulted in an internal board investigation and a shareholders' deriviative lawsuit. Reviewing all of this within the lottery framework of criminalizing agency costs, Larry Ribstein observes wryly:

[M]ost of the stuff at Krispy Kreme happened after Sarbanes-Oxley. And it?s getting fixed by a special committee and a derivative suit that the company has allowed to proceed. So what is it, exactly, that we are getting from Sarbanes-Oxley?

Posted by Tom at 7:40 AM | Comments (1) |

AIG's good year?

Given that American Insurance Group, Inc. restated $3.9 billion of profit earlier this year, had various government investigations wipe out about $60 billion of market capitalization, was sued by regulators, and unceremoniously dumped its longtime chairman and CEO Maurice "Hank" Greenberg, you would think that its leaders would at least acknowledge that the company's year has been about as bad as that of Mike Lamb.

Not so, and the reason is that the cost of the foregoing setbacks was merely the price of forging a productive relationship with the Lord of Regulation and other government regulators, as current AIG interim Chairman Frank G. Zarb told AIG shareholders yesterday in the company's annual meeting:

"A.I.G. in recent months has forged a productive, constructive, professional relationship with our regulators. This company is committed to working openly, without reservation."

Thus, the foregoing statement makes clear that AIG has changed its tune toward regulators from the position espoused by Mr. Greenberg, who once observed that regulators turn "foot faults into murder charges." It remains decidedly unclear whether that relationship will prove as valuable for AIG's shareholders as Mr. Greenberg's management of the company.

Posted by Tom at 6:53 AM | Comments (2) |

Now, that's having a tough season

Stros reserve firstbaseman Mike Lamb is having a bad season. Coming off the best season of his career in 2004 (11 RCAA/.356 OBP/.511 SLG./867 OPS), Lamb has regressed this season to an Ausmusian -11/.259/.389/.649 stat line.

Consistent with Lamb's futility at the plate this season, in the Stros' win on Wednesday against the Nationals this week, Lamb should have been credited with a walk in the sixth inning, but instead stayed in the box and popped out to third after the plate umpire lost track of balls and strikes. At least Lamb has retained his sense of humor, as reflected by his observation about the incident in today's Chronicle:

"What a year I'm having. Now I'm making outs on walks."

Posted by Tom at 6:14 AM | Comments (0) |

Abramoff indicted

Jack Abramoff, a lobbyist who is a top Republican fund-raiser and political ally of Houston congressman and House Majority Leader Tom DeLay, was indicted yesterday in Ft. Lauderdale, Florida on charges of defrauding two lenders in his purchase of a casino cruise line five years ago. Mr. DeLay is not mentioned in the indictment and apparently had no involvement in the activities that led to this particular indictment. As noted in these previous posts, the Justice Department is also investigating Mr. Abramoff for allegedly bilking four Indian tribes he represented in connection with his lobbying business.

The grand jury indicted Mr. Abramoff and a business partner for allegedly using a fake $23 million wire transfer in 2000 to help secure loans needed to purchase 11 cruise ships, 2,300 slot machines and 175 gambling tables in a deal for the $147.5 million SunCruz Casinos business operation. The indictment alleges that two lenders agreed to lend Mr. Abramoff and his partner $60 million for the purchase on the condition that the pair ponied up $23 million on their own. Mr. Abramoff and his partner are accused of falsifying wire transfer receipts to make it appear as if they had the $23 million. SunCruz later ended up filing a chapter 11 case.

Mr. DeLay's relationship with Mr. Abramoff came under media scrutiny and an ethics controversy earlier this year after it was reported that Mr. Abramoff or his clients had paid for Mr. DeLay to take several expensive tours of Scotland, London and Russia. Inasmuch as members of Congress are not allowed to accept trips from lobbyists, the matter has been under investigation by the House Ethics Committee, although the investigation has appeared to bog down over the past several months.

Posted by Tom at 5:08 AM | Comments (0) |

KPMG noose tightens

On the heels of this post from yesterday, this NY Times article reports on the plea bargain of Domenick DeGiorgio, a 42 year old former managing director at the New York branch office of Munich-based HVB, (formally known as Bayerische Hypo & Vereinsbank) under which he pled guilty to fraud, conspiracy and tax-evasion charges in the federal government's first criminal conviction in its investigation of allegedly fraudulent tax shelters that KPMG LLP created and promoted. Here are the previous posts on the KPMG tax shelter saga.

According to the plea bargain, Mr. DeGiorgio had been responsible for supervising HVB's participation in various shelter transactions that allowed wealthy individuals claim more than $1.3 billion in fake tax losses. Those transactions included a KPMG tax shelter known as "Bond Linked Issue Premium Structure" ("Blips), which the government has characterized as a fraudulent shelter. The investigation appears to be focusing on that shelter, which the plea bargain described the shelter in the following manner:

An essential part of creating reported tax losses depended on the bank purporting to provide a loan structured in a particular way," he said. "The loan proposed by the Blips promoters was a sham because, among other things, as designed, no money ever left the bank, and because HVB never set aside any of its own money or procured funds from the banking market in order to fund any of these loans.

Blips was falsely represented to be a three-stage, seven-year investment program when, in reality, it was a short-term transaction designed to create tax losses.

In a prepared statement, the government stated the following regarding the plea bargain:

Our self-reporting tax system can not tolerate the fraudulent acts of bankers, accountants and lawyers who, under the guise of "sophisticated tax planning," create elaborate structures that have no purpose but to mislead and defraud the IRS, at the cost of billions of dollars to the U.S. Those who seek to devise, implement, and profit from these fraudulent structures should understand that we will devote whatever resources it takes to put a stop to them.

Mr. DeGiorgio's guilty plea turns up the heat on KPMG noted in yesterday's post as it negotiates the with prosecutors over a deferred adjudication agreement that would head off an indictment against the firm that would likely cause an Arthur Andersen-type meltdown of the firm. In that regard, look for a number of former KPMG tax professionals to be indicted in the coming weeks.

Posted by Tom at 4:36 AM | Comments (0) |

August 11, 2005

The Power of Pork

Tory Gattis and I recently generated some interesting discussion regarding mass transit generally and light rail in particular in a series of posts (here, here and here). Part of the psychology in favor of the light rail projects discussed in that blog thread is that the federal government -- regardless of economic merit -- is going to throw some political pork barrel funds at light rail projects, so light rail proponents reason that we might as well claim our fair share.

Although that line of reasoning is understandable, it doesn't really make me feel any better about the pork being distributed in the first place. This Washington Post article provides a good analysis of the politics of the new transportation bill:

Three years ago, President Bush went to war against congressional pork. His official 2003 budget even featured a color photo of a wind-powered ice sled -- an example of the pet projects and alleged boondoggles he said he would no longer tolerate.

Yesterday, Bush effectively signed a cease-fire -- critics called it more like a surrender -- in his war on pork. He signed into law a $286 billion transportation measure that contains a record 6,371 pet projects inserted by members of Congress from both parties.

$286 billion in 6,371 pet projects? Let's see, we have 535 representatives and senators in Congress. So, that's about 12 pet projects per representative or senator. But if the number and cost of those projects troubles you, just remember that it's all relative:

[White House spokesperson Trent] Duffy replied [to a question about the bill's cost] that Bush pressured Congress to shave billions of dollars off the bill, and he said spending is "pretty modest" when spread out over five years. The transportation bill, at $57 billion a year, is a fraction of Medicare's $265 billion.

Besides, Duffy said, "the president has to work with the Congress."

In other words, we are supposed to feel better because the annual cost of the pork, when spread over five years, is only about 20% of the blackhole of annual Medicare expenditures.

Somehow, that doesn't make me feel all that much better. Here is another critical analysis of the bill.

Posted by Tom at 7:34 AM | Comments (0) |

The high price of asserting innocence

A frequent topic on this blog has been the government's questionable tactic of bludgeoning business executives into plea bargains by playing on the executive's fear of a draconian prison sentence (often an effective life sentence) if the executive has the temerity to assert his or her Constitutional right to a fair trial by jury. Although prosecutors justify such tactics as a reasonable tool in seeking the truth about criminal acts of others, plea bargainers often undermine that goal by testifying falsely in order to obtain the favorable terms of the deal.

In this post, Ellen Podgor -- who blogs with Peter Henning over at the smart White Collar Crime Prof blog -- compares the sentences to date arising out of the prosecutions of former WorldCom executives, notes the wide disparity between those who cooperated with the government and those who did not, and then asks the right questions:

With the disparity in sentences so far (25 years for Ebbers in contrast to others), sentences not based solely on the culpability of the individual but significantly premised on cooperation, will defendants in other cases be encouraged to cooperate? . . . one also has to wonder if the incentive for cooperation is too high and may result in encouraging individuals to provide cooperation that may not be truthful.

What happens to the individual who is last to be indicted when there is no one left to talk against and no way to provide cooperation? What happens when the the accused has nothing to offer in cooperation because they did not see or hear anything? Are we punishing these individuals with heavier sentences merely because they have nothing to offer the government? Should we be afraid that they will invent something to tell the government just to obtain a reduced sentence?

The Bill of Rights provides everyone accused of a crime with the right to a jury trial. Are we punishing individuals who avail themselves of this right?

Yale law professor John Langbein has written extensively regarding prosecutorial abuse in the American plea bargaining system, and he identifies the problem in the following manner:

"Plea bargaining concentrates effective control of criminal procedure in the hands of a single officer. Our formal law of trial envisages a division of responsibility. We expect the prosecutor to make the charging decision, the judge and especially the jury to adjudicate, and the judge to set the sentence. Plea bargaining merges these accusatory, determinative, and sanctional phases of procedure in the hands of the prosecutor. Students of the history of the law of torture are reminded that the great psychological fallacy of the European inquisitorial procedure of that time was that it concentrated in the investigating magistrate the powers of accusation, investigation, torture and condemnation. The single inquisitor who wielded those powers needed to have what one recent historian has called 'superhuman capabilities [in order to] . . . keep himself in his decisional function free from the predisposing influences of his own instigating and investigating activity.'"

"I cannot emphasize too strongly how dangerous this concentration of prosecutorial power can be. The modern prosecutor commands the vast resources of the state for gathering and generating accusing evidence. We allowed him this power in large part because the criminal trial interpose the safeguard of adjudication against the danger that he might bring those resources to bear against an innocent citizen -- whether on account of honest error, arbitrariness, or worse."

This situation reminds one of the scene in the movie The Aviator to which Larry Ribstein has referred on several occasions. In the scene, Howard Hughes asks Senator Brewster if he wants to go to war with him, and Brewster says:

"It's not me, Howard. It's the United States government. We just beat Germany and Japan. Who the hell are you?"

What really is the bigger problem to American society and the rule of law? Criminal business executives or out-of-control prosecutors?

My answer is here and here.

Posted by Tom at 6:28 AM | Comments (1) |

KPMG strikes deal in tax shelter probe

You know that the criminalization of business in the post-Enron era has become routine when it's newsworthy that the government has decided not to use its prosecutorial power to prompt another Arthur Andersen-type meltdown of a major accounting firm.

This NY Times article reports that KPMG and federal prosecutors have agreed in principle to a deferred prosecution deal under which the accounting firm would avoid a devastating criminal indictment for its involvement in the creation and promotion of questionable tax shelters in return for KPMG paying a hefty fine, which the Times article reports could be as much as half a billion dollars. Here are the earlier posts on the KPMG tax shelter probe and related problems.

Interestingly, the Times reports that one of the reasons that prosecutors are considering not indicting KPMG is that reasonable doubt exists as to whether the tax shelters that the firm created were improper. Unfortunately, that little "not illegal" technicality has failed to deter prosecutors in this post-Enron era from prosecuting a raft of other business interests for merely questionable conduct that is not clearly improper. To make matters worse, the federal government pursued that dubious policy in putting Arthur Andersen out of business and thus decreasing the number of large auditing firms, while at the same time increasing corporate compliance responsibilities that require more services of large auditing firms. So much for well-coordinated public policy, eh?

Of course, KPMG is not out of the woods yet by any stretch. The enormous fines and legal fees attendant to resolving the tax shelter probe and lawsuits alone is enough to cast some doubt on KPMG's ability to survive as a going concern. However, given the paucity of large accounting firms these days to handle the demand for publicly-owned company auditing services, even the drain of high fines and litigation costs is probably not enough to push KPMG over the edge. KPMG customers will simply pay a substantial portion of KPMG's costs in the form of higher fees, which raises the following legitimate issue: Why on earth are they required to pay more for all of this?

Posted by Tom at 5:21 AM | Comments (0) |

August 10, 2005

A special talent

I have no idea where my nephew Richard comes up with such things, but the two minute video that he links to in this blog post is pretty darn clever.

By the way, Rich, I highly recommend that you do not attempt to perfect the skill evidenced in the video while juggling your distractions this fall at Northwestern University Law School. Not that it would interfere with your studies that much. Rather, too many professors would be pestering you to teach them how to do it! ;^)

Posted by Tom at 8:26 AM | Comments (1) |

The PGA at Baltusrol is this week

The PGA Golf Championship begins tomorrow at Baltusrol Golf Club in Springfield, N.J. Golf Digest has its usual excellent coverage here, including this nifty interactive map.

By the way, this interesting Golf Digest article on the 1965 PGA Tournament -- which was won by the late Houstonian Dave Marr -- includes a funny anecdote about Ben Hogan that Dave passed along to me years ago over lunch at Houston's Lochinvar Golf Club. Dave loved telling this story and did so humorously, so my written rendition of it cannot do Dave's oral version justice. But the story went something like this:

Hogan and the players with whom he was playing his practice rounds that week showed up for their Wednesday practice round and were promptly informed that there had been a misunderstanding on their tee time. As a result, Hogan's group could not tee off for two hours because there were so many groups already waiting in line ahead of his group. Hogan was not pleased.

So, Hogan strolled over to the edge of the first tee and began intensely studying the practice swings of each of the club pros in the foursome who were warming up to tee off at that time. Hogan's scrutiny clearly made each of the pros uncomfortable -- not only was Hogan a legend among his peers, but every one of them knew about Hogan's discriminating (and sometimes bluntly derisive) opinion of his rivals' golf swings.

Under Hogan's stern glare, the first club pro finally gathered the courage to tee up his ball and swing, which produced an ugly flinch and a sky ball that went less than 100 yards. The second pro hurriedly teed his ball up and then swung, producing a severe duck hook into the trees. Next, the third pro stepped up the tee and promptly topped his ball just past the ladies tee. Finally, the fourth pro teed his ball up, but as he attempted to take a practice swing, he could not even make himself take the club back under Hogan's penetrating stare. So, rather than attempting to tee off, the fourth pro picked up his ball and walked over to Hogan:

"Look, Mr. Hogan, if you don't tee off in front of us, I'm afraid that I won't be able to swing the club today. Also, our group is so traumatized by what we just did here in front of you that we'll play so slow that everyone teeing off behind us probably won't finish their rounds today before dark. So, would you mind cutting in front of us right now and teeing off?"

Hogan graciously accepted the offer and his group proceeded to tee off immediately.

By the way, Marr is legendary (at least among Texans) for his characterization of a syphon used during the early days of the PGA Tour to steal gasoline to fuel travel between tournaments as "an Oklahoma credit card." ;^)

Posted by Tom at 6:45 AM | Comments (0) |

The SOX drain

The Sarbanes-Oxley legislation (pdf) is an example of government at its worst -- a knee-jerk reaction that addressed a relatively small problem (i.e., crooked businesspeople) that had little to do with the circumstances (i.e., the bursting of a stock market bubble) that prompted legislators to think that they needed to do something in the first place. Inasmuch as the SOX legislation coincided with the beginning of this blog, the counterproductive nature of the legislation has been a regular subject here, here, here, here, here, here, here and here.

In this timely article, financial columnist Bruce Bartlett (his blog is here) notes that the SOX effect on the economy is only getting worse, and reviews the growing body of research on the negative economic impact of SOX:

Estimates of the cost of the legislation in terms of higher audit fees and lost productivity have risen every year, as companies learn more about its provisions. It is now commonly estimated to be about $15 billion per year, or about $1 million per $1 billion of sales. This estimate is pretty consistent among the organizations that have looked at Sarbanes-Oxley carefully, including Financial Executives International, a trade group; Foley and Lardner, a Chicago law firm; and A.R.C. Morgan, a Dutch consulting company.

Two University of Illinois accounting professors estimated last year that companies had spent 120 million hours complying with Sarbanes-Oxley and that outside auditors had spent another 12 million hours, for a total of 132 million hours. This is equivalent to 66,000 people working for one year on nothing else.

But these direct costs pale in comparison to intangible costs. Corporate executives report an enormous amount of distraction from their core businesses as the result of Sarbanes-Oxley, and they have become much more conservative in their investment strategies. . .

The latest study looks at how the stock market reacted to passage of Sarbanes-Oxley. University of Rochester economist Ivy Zhang found that passage of the bill wiped out $1 trillion of market capitalization. Zhang found no economic benefits to the legislation whatsoever, . . .

Despite the fact that Sarbanes-Oxley has done nothing to improve business performance or investor value, Mr. Bartlett concludes with the following observation:

Bush administration officials are well aware of the negative effects of Sarbanes-Oxley on the economy and the stock market, but they will not do anything about it -- a view recently reiterated by Rep. Michael Oxley, Republican of Ohio and co-author of the legislation. They would rather see businesses and investors continue to suffer than admit the possibility of error.

Remember that the next time you hear the Republican Party assure you that the GOP is the "business-friendlier" major political party.

Posted by Tom at 5:52 AM | Comments (3) |

Disney Board wins the corporate case of the decade

The Delaware Chancellory Court issued its ruling yesterday in favor of the Walt Disney Company Board of Directors in the corporate case of the decade -- i.e., the civil lawsuit over The Walt Disney Co. board's decision to pay Michael Ovitz a rather generous severance package for essentially doing nothing during his short stay at Disney (earlier posts on the case are here, here and here). You can download a copy of the 175 page decision here and, based on a preliminary review, it appears that Larry Ribstein nailed it with his earlier prediction, which also provides excellent background on the fact and legal issues involved in the case. H'mm, I wonder if Professor Ribstein got any odds on his bet on the outcome of the decision?

As noted in this earlier post, check in at the Conglomerate blog for a discussion of the Disney decision by an outstanding group of corporate law scholars. Should be highly entertaining.

From my preliminary review, Chancellor Chandler rejected the plaintiffs' arguments, although he did toss several sharp barba at Disney chairman and CEO Michael Eisner and the Disney directors' actions during the Ovitz affair, including that the board's conduct "fell significantly short" of best business practices. Nevertheless, that's not the same as a breach of their fiduciary duties or waste, the judge concluded:

"It is easy, of course, to fault a decision that ends in failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk -- the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known."

Mr. Eisner hired Mr. Ovitz in 1995, but the hiring quickly turned into a debacle that led to a termination of Mr. Ovitz without cause after roughly a year. Shareholders argued that Disney's directors failed to fulfill their fiduciary duties in regard to either the hiring or the without cause termination, and contended that Mr. Ovitz should have canned for cause and denied his severance package. Accordingly, the plaintiff shareholders asked the court to assess damages of more than $262 million -- $129.8 million in damages plus $132.5 million in interest -- against some current and former members of the board, including Mr. Ovitz and Mr. Eisner. The directors countered by arguing that they agreed to the without cause termination and payment of severance to Mr. Ovitz to head off an expensive lawsuit that would have distracted management and risked causing shareholders much more in reduced share price than the settlement amount paid to Mr. Ovitz.

Here are a few money quotes from the decision:

"Should the Court apportion liability based on the ultimate outcome of decisions taken in good faith, decision-makers would take decisions that minimize risk, not maximize value."

"By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz's hiring in particular, Eisner to a large extent is responsible for the failings . . . that infected and handicapped the board's decisionmaking abilities."

"Eisner stacked his (and I intentionally write 'his' as opposed to 'the Company's') board of directors with friends and other acquaintances who .. were certainly more willing to accede to his wishes . . . than [act as]truly independent directors."

"As it relates to [Ovitz's] job performance, I find it patently unreasonable to assume that Ovitz intended to perform just poorly enough to be fired quickly, but not so poorly that he could be terminated for cause. First, based on my personal observations of Ovitz, he possesses such an ego, and enjoyed such a towering reputation before his employment at the Company, that he is not the type of person that would intentionally perform poorly. Ovitz did not build Hollywood's premier talent agency by performing poorly."

Interestingly, Professor Bainbridge's Texas Law Review article on executive compensation is cited in the decision's first footnote.

Posted by Tom at 4:15 AM | Comments (0) |

August 9, 2005

The politics of charity in the world of health care

Wealthy Houston plaintiff's lawyer John O'Quinn (earlier posts here and here) recently proposed to donate $25 million to St. Luke's Episcopal Hospital -- the largest gift in the hospital's 50 year history -- in return for renaming the hospital's highly-recognizable medical tower the "O'Quinn Medical Tower at St. Luke's."

Well, the Chronicle's Todd Ackerman, who does a fine job of staying on top of Medical Center stories, reports in this article that the St. Luke's board's decision to accept the donation from Mr. O'Quinn is not going over well with a number of St. Luke's doctors:

The plan to rename the edifice after John O'Quinn in recognition of a $25 million donation by his foundation has infuriated many St. Luke's doctors, who last week began circulating a petition against it and Monday night convened an emergency meeting of the medical executive committee.

"Perhaps you are unaware of the intensity of feelings held by many physicians about Mr. John O'Quinn," says the petition, which is addressed to the Rev. Don Wimberly, bishop of the Episcopal Diocese of Texas and chairman of the St. Luke's Episcopal Health System board of directors. "The primary source of his financial success has been representing plaintiffs in medical liability and products liability cases, many of them groundless."

Dr. Priscilla Ray, a psychiatrist who wrote the petition, said that even though doctors were let out of the breast-implant litigation, it was onerous because they had to hire lawyers, prepare for trial and be deposed.

"The bottom line is, Mr. O'Quinn has contributed toward the litigious environment in which doctors work, toward the changed relationship between doctors and patients," said Ray. "Now, doctors have to fight not to see each patient as potential plaintiff, and patients might have impaired confidence in their doctor."

"It offends us to have money we earned ? and which he took by suing us ? going to name after him a medical building in which we work each day," says the petition. "The naming of buildings at the law school or perhaps at a medical liability carrier seems much more appropriate."

Well, the University of Houston is way ahead of the docs on that idea, as the law school has already named its library after Mr. O'Quinn. But now that idea on the medical liability carrier building . . .

Despite the current hub-bub, my sense is that this will die down soon and the board's decision to accept the donation will not be changed. Raising funds is too important in the dog-eat-dog worlds of academic medicine and health care finance to let little things such as principle stand in the way of a big donation.

Posted by Tom at 6:21 AM | Comments (2) |

George Melloan gets it

A couple of months ago, this post noted Wall Street Journal columnist George Melloan's op-ed on the Supreme Court's Andersen decision in which he harshly criticized the government's abuse of the rule of law to pursue currently unpopular businesspeople. Today, in this WSJ ($) Global View column, Mr. Melloan focuses on a common subject of this blog -- the unjust nature of criminalizing corporate agency costs.

Mr. Melloan's column focuses on the agency cost of corporate accounting:

Corporate accounting, contrary to popular belief, is chock-full of judgment calls. It's a happy hunting ground for a prosecutor looking for decisions he can say were intended to mislead investors and might thus constitute criminal fraud. If an admiring press rewards him with a big headline, who's to know, . . ?

Mr. Melloan then points out how prosecutors play to public bias in frightening boards of directors and executives into submission:

The frightened AIG board played into Mr. Spitzer's hands by summarily firing Mr. Greenberg and ordering a five-year review of AIG financial statements. The restatement reduced stockholder equity by a net $2.264 billion. How could the earlier results reported have been that far off? A credulous public is likely to suspect that Mr. Greenberg was guilty -- of something.

But corporate accounting is not a black and white world, notes Mr. Melloan:

But most people don't know how flexible corporate accounting can be, particularly in an insurance company. At AIG, the auditors and some of the executives who furnished the restatement had produced the very reports they were revising. AIG operates in 130 countries and conducts "tens of millions" of transactions every year. Restatements in such a complex world aren't extraordinary, for reasons, like honest mistakes, that are not criminal in nature. Merely adjusting the amount of earnings set aside for loss reserves -- a judgment call based on guesses about what damage the future holds -- can make a world of difference. . .

Accountants' views on such matters may differ widely, but one or the other conclusion does not necessarily imply intent to defraud. Indeed, accounting is a profession well known among its insiders for its uncertainties and ambiguities. When the outside auditors of American companies sign off on a financial report, they don't claim infallibility.

In closing, Mr. Melloan notes the dire consequences of this criminalization policy, including one that has been common in the case of Enron -- the bludgeoning of executives into plea bargains by threatening effective life sentences if the executive risks defending his or her actions in court:

Another troubling sign . . . is that companies are fleeing from the court system, convinced that it is better to plea bargain with an aggressive prosecutor than to risk a jury trial. "Going to trial has become too risky for too many corporations because so many aspects are stacked against defendants . . .," says Exxon-Mobil Chief Counsel Charles W. Matthews, Jr., . .

What this suggests is that the American legal system is itself breaking down under the burden of too much rule making and litigation aimed at raiding the deep pockets of business corporations. . . It would be nice to think that this will bring better decisions and greater transparency of benefit to investors. But what it looks like now is just a lot more money -- a lot more -- for lawyers and accountants.

For another case study in the syndrome that Mr. Melloan identifies, note this post and related posts referred to therein on the prosecution of the four Merrill Lynch defendants in the Enron-related Nigerian Barge case.

Posted by Tom at 4:58 AM | Comments (0) |

On the Internet's booms and busts

Rich Karlgaard is publisher of Forbes magazine and author of Life 2.0 (Crown Business, 2004). In this wonderful Wall Street Journal ($) op-ed, Mr. Kaalgaard examines the tremendous progress of the Internet over the past 20 years by pointing out that the risks taken in the booms and busts during the period are the engine of that progress. He uses the wildly over-priced Netscape IPO of 10 years ago (has it really been that long?) as one of his examples of the risk-taking that did not work out, and wryly passes along the following anecdote about one analyst's attempt at a joke about pricing Internet companies during those exuberant times:

Analyst Bill Gurley sends out a spoof email. After noting the history of deteriorating valuation benchmarks, from cash flow, to EBIT, to EBITDA, to "price-per-click," announces the ultimate Internet valuation benchmark: EBE, or "earnings before expenses." Most readers don't realize Mr. Gurley is joking.

Posted by Tom at 4:37 AM | Comments (0) |

August 8, 2005

This is a bit out of my league

This NY Times article reports on the progress of the new Liberty National Golf Club, which is located just across the Hudson River from Manhattan. With its breathtaking views of the Manhattan skyline and the Statute of Liberty, the golf course is generating quite a buzz in golfing circles, although not among the crowd that I normally play with:

[T]he lush and very private Liberty National Golf Club has sprouted across from the Manhattan skyline. This $150 million project by Paul B. Fireman, the property's owner and the chief executive of Reebok; his son Dan; and the golf-design tandem of Kite and Bob Cupp is creating a buzz less than a year before the first players tee off.

Built on 160 acres and covering 4,000 feet of waterfront, the course stretches 7,400 yards from the back tees, with small rivers running through it and a $1 million cart path built with Belgian stones. . . The course will offer a 15-minute luxury yacht service from Manhattan and, for those with quicker needs, a helipad.

Each member will have a custom-made set of clubs that will always be available at the course, a kind of thank-you gift for joining a club with an initiation fee of around $500,000.

Sure am glad they put in that helipad. ;^)

Posted by Tom at 9:27 AM | Comments (3) |

Plaintiffs in Enron class action plaintiffs turn up the heat on Merrill Lynch

Assuming that you have not already been chloroformed by the recent discussion of the Nigerian Barge criminal case, this AP story reports on a development last week that tees up Merrill Lynch's involvement in that transaction where it ought to be examined -- in a civil lawsuit.

This past Friday, the plaintiffs in the main Enron securities fraud class action lawsuit filed a motion for partial summary judgment against Merrill Lynch requesting that the federal district court find that the jury findings in the Nigerian Barge criminal case collaterally estop Merrill from defending itself in the class action on the liability issue regarding its alleged participation in Enron's misleading financial reporting to investors. If U.S. District Judge Melinda Harmon were to grant the motion, then the parties would proceed to trial with a liablity finding against Merrill Lynch and the only issue for the jury to determine in regard to Merrill would be the amount of damages that should be assessed against Merrill. As Morgan Stanley can tell you, that's not a position that a corporate defendant wants to be in at the beginning of a trial.

Interestingly, the lawyers for the plaintiffs in the Enron class action apparently prepared a similar motion and presented it to Canadian Imperial Bank of Commerce, which then chose to settle last week rather than take the risk of being left with only damage issues during the trial on the merits. The same tactic was used on Merrill, which apparently rejected the opportunity to settle before the motion was filed.

Merrill Lynch has already paid $80 million to the Securities and Exchange Commission to settle civil allegations related to its involvement in the Nigerian Barge transaction, but -- as is common in such settlements -- Merrill neither admitted nor denied wrongdoing. I have not had an opportunity to read the motion yet, but my inital sense is that it is a longshot, at best. Merrill was not a party to the criminal proceeding against the four former Merrill Lynch defendants who were convicted in the Nigerian Barge criminal case, so a threshold issue exists as to whether application of collateral estoppel is even appropriate. Moreover, as noted in the blog thread on the criminal case, the evidence during the Nigerian Barge criminal trial was equivocal, at best, as to whether Merrill did anything wrong in connection with the transaction.

Posted by Tom at 6:35 AM | Comments (0) |

Is Berkshire becoming a target?

This NY Times article reports that Berkshire Hathaway Inc. has disclosed that government authorities are probing at least one of the company's insurance subsidiaries other than General Reinsurance Corp. over accounting of "finite risk" reinsurance transactions. Here are the previous posts on the wide-ranging probe into Berkshire, General Re, and others over such transactions.

Moreover, as noted in this London Telegraph article, Berkshire announced that it is also facing regulatory investigations in England, Ireland, Germany and Australia. In that regard, Berkshire also announced that it had terminated the employment of former reinsurance executive Milan Vukelic, who has been under investigation by those overseas authorities.

Berkshire's General Re unit surfaced earlier this year as part of state and federal authorities' investigations into American Insurance Group and its former chairman and CEO, Maurice "Hank" Greenberg, over whether some insurance companies have disguised loans as "finite-risk" reinsurance. Reinsurance is coverage that insurance companies buy to allocate risk of loss on the policies that they sell, and finite-risk reinsurance is a nontraditional type of structured finance transaction that blends finance with insurance. This latest disclosure is the first indication that regulators are focusing on the the Berkshire subsidiaries' own accounting own accounting of the transactions and not just their involvement with AIG in regard to such transactions. Two former General Re executives have pleaded guilty to conspiring to commit fraud to help AIG misrepresent its financial results.

Meanwhile, the magnitude of the change in Berkshire's reported reinsurance results prompted several equity analysts -- including Standard & Poor's Equity Research -- to issue a "sell" recommendation on Berkshire shares based on profitability concerns and reputational risk. Mr. Greenberg and former Enron executives are well-prepared to advise the Oracle of Omaha on the vagaries of such reputational (or sometimes called "headline") risk.

By the way, Mr. Buffett has been an outspoken bear for some time on the U.S. dollar. However, his sizable currency bets over the past couple of years have been were a continuing drain on Berkshire's finances. For the most recent quarter, Berkshire reported about a $620 million pretax loss in market value on its foreign-currency investments, compared with a pretax loss of almost $450 million a year earlier.

Posted by Tom at 6:02 AM | Comments (0) |

Heat turned up a notch on Milberg Weiss

This Wall Street Journal ($) article reports that federal investigators have turned up the pressure in its investigation of several prominent plaintiffs class action securities lawyers at the former Milberg, Weiss law firm, including granting immunity to a former Milberg Weiss lawyer who worked closely with William S. Lerach, who has already been fingered as a target of the investigation. Here are the prior posts on the investigation and related matters pertaining to the firms involved.

The long investigation (at least four years) is focused on whether Milberg Weiss arranged to have undisclosed payments made to individuals whose names the firms repeatedly used as "name" plaintiff in securities class-action lawsuits. Payments to name plaintiffs in such lawsuits are generally subject to approval by the courts overseeing the cases to minimize the inherent conflict-of-interet that exists between the individual's desire for compensation and the interests of the rest of the class.

Interestingly, Alan Schulman, the former Milberg, Weiss partner who is now apparently cooperating with investigators under the immunity grant, left the firm in 2000 and opened the San Diego office of Bernstein Litowitz Berger & Grossmann LLP (known as "BLB&G"). BLB&G, Milberg, and Mr. Lerach's new firm regularly compete for lead counsel status in plaintiffs class action securities fraud cases. Mr. Lerach's firm -- which is the lead law firm for the plaintiffs in the big Enron securities fraud class action -- recently announced a settlement that put the aggregate settlements in the Enron class action over the previous record that BLB&G helped establish as lead counsel in the WorldCom securities fraud class action. The fact that BLB&G could benefit from an indictment against Milberg or its former partners by having less competition for lead counsel status in future class action lawsuits casts a troubling light on Mr. Schulman's immunity deal and related testimony.

Meanwhile, this LA Times article reports on the testimony in the divorce case of Stephen Cooperman, the former Beverly Hills eye surgeon who has served up testimony against Milberg Weiss as a means by which to obtain a lighter sentence for his 2001 conviction in an insurance scam. Mr. Cooperman, served as name plaintiff in about 60 class action cases that Milberg Weiss handled, has admitted engaging in several fraudulent schemes and likely will not be a credible witness against Milberg, Weiss.

Posted by Tom at 5:13 AM | Comments (0) |

More thoughts on the Merrill Lynch defendants' Nigerian Barge appeal

Having tended to my "day" job at the end of last week, I wanted to pass along some further thoughts on the lively discussion that erupted between Vic Fleischer, Larry Ribstein, other commentators, and me last week in regard to my post on the four former Merrill Lynch executives who are appealing their convictions in the Enron-related Nigerian Barge case to the Fifth Circuit Court of Appeals. Given the importance of the issues addressed in this blog thread to businesspeople, the American economy and the rule of law, I appreciate everyone's interest in the thread and their contributions.

For those who want to read the prior posts in order:

Here is my original post on the former Merrill Lynch executives' appeal;

Here is Larry's first post noting my post;

Here is Vic's first post responding to both Larry and my post;

Here is Larry's response to Vic's first post;

Here is my response to Vic's first post;

Here is Larry's post regarding my response to Vic's first post; and

Here is Vic's second post that replies to my response to his first post.

This post replies to Vic's latest post and attempts to circle the thread toward a coherent close.

In his post regarding my response to Vic's first post, Larry really asks the right questions and identifies the importance of the issues:

The question raised . . . is whether the criminal prosecution of this transaction, particularly in the way it has been done by the government, . . . was appropriate?

If the existence of a promise is essential to criminal liability, does the evidence . . . look even close to enough to hang a substantial prison sentence on?

[W]e academics . . . have an obligation to get this right. This is about how the power of government is and should be used against business, and so is immensely important to this country's economic well-being. The newspapers and movies have slanted this issue, and the partisans either side will be discounted. We in the academy therefore have special influence.

So, really what we have is a narrower issue regarding whether Enron accounted properly for the Nigerian Barge transaction with Merrill Lynch -- an issue that Vic focuses on more than Larry and me -- and the broader issue of whether the government should be criminalizing such a transaction, which Larry and I tend to focus on more than Vic.

On the narrower issue, Vic is skeptical that the Nigerian Barge transaction constituted a true sale upon which Enron could book immediate earnings. He is suspicious of the deal's structure, but more substantively, believes that Fastow probably made an oral promise (albeit unenforceable) that Enron would backstop Merrill's investment either through an Enron repurchase of Merrill's interest or by brokering a sale of that interest to a third party. Vic reasons that the existence of this oral promise -- although neither Fastow nor anyone who heard the alleged promise testified during the trial -- means that no or inadequate risk was shifted from Enron to Merrill for the transaction to constitute a true sale.

On the larger issue, Vic concludes that Enron probably booked improper earnings intentionally. Apparently because each of the Merrill defendants was involved in the transaction in at least some small way, Vic reasons that the prosecution of the Merrill defendants was not particularly unreasonable, even though he concedes that it's probably not a particularly strong criminal case.

On the other hand, my position on the narrower issue is that transaction was a true sale. The structure may have been for expediency, to facilitate a future transaction, or simply because Enron liked doing structured finance transactions, as noted in this earlier post. However, there was nothing inherently wrong with the structure of the deal. Moreover, Merrill undertook plenty enough risk for the transaction to constitute a true sale, probably best reflected by the fact that Fastow's crime partner Kopper would not agree to have LJM2 buy the interest from Merrill until the risk of non-payment from the source of Merrill's dividend stream was hedged through the pledge of security from a third party. Consequently, my sense is that whatever unenforceable assurance that Fastow may have provided to Merrill -- and the evidence is reasonably clear that Fastow never promised that Enron itself would buy back the interest -- had a negligible effect on Merrill's considerable risk in the deal.

However, putting aside for a moment the competing arguments on the narrower "true sale" issue that could make for lively debate in a corporate accounting class or civil lawsuit, the more important issue is the one that Larry raises:

Is there evidence of criminality here in regard to the four former Merrill Lynch executives that even comes close to fulfilling the government's burden of establishing proof beyond a reasonable doubt?

The correct answer is a resounding "no," and my big difference with Vic is that I do not believe that this is even a close call. The question of whether Enron booked its earnings relating to the Nigerian Barge transaction correctly, improperly, or fraudulently is different from the issue of whether the Merrill defendants engaged in criminal conduct by carrying out their duties in connection with the transaction. Inasmuch as Enron and Merrill always viewed Merrill as a "bridge" owner of the interest, there was nothing wrong -- much less criminal -- with Merrill obtaining assurances from Fastow that Enron would assist in finding a buyer who would take Merrill out of the investment after a short hold. This is not much different than a banker seeking a business owner's personal assurance that a non-recourse loan to the owner's business will be repaid even if the company defaults and its security for the loan turns out to be inadequate. That's just part of the process in which businesspeople gain confidence in taking on risks.

Indeed, if Fastow's assurance to Merrill in the Nigerian Barge transaction was -- as Vic suggests -- the basis of a crime, then dozens of Merrill executives, lawyers, and accountants who reviewed and approved the transaction were also involved in that criminality. They all knew and agreed that having Dan Bayly obtain Fastow's assurance that Merrill would be taken out was a good idea. Why have they not been prosecuted? Why are the four former Merrill executives being singled out? Why on earth is William Fuhs -- who had nothing to do with structuring or approving the transaction, and handled only a few ministerial tasks in regard to the deal -- going to jail for over three years away from his wife and two young children when the other Merrill executives, lawyers, and accountants who structured and approved the deal get off scott free?

Don't get me wrong. I don't believe that either Merrill or its four former executives came even close to crossing the line of criminality in regard to this transaction. But if you accept Vic's analysis that they did, then you cannot logically stop with the four sacrificial lambs named Bayly, Furst, Brown and Fuhs. You must prosecute the company and everyone involved in the transaction, and then prepare to take shelter from the economic storms that would follow as implementation of such a dubious criminalization policy would inevitably lead to a raft of Arthur Andersen-type meltdowns. That is why corporate and individual responsibility in such matters -- as Larry has repeatedly pointed out on his blog -- is best sorted out in civil lawsuits.

Finally, Vic does not add much to the discussion by observing that the prosecution of the Merrill defendants has been fair because they have been afforded procedural due process. Although rather sad and humorous at the same time, it's a reflection of the post-Enron era of anti-business sentiment that "fairness" in regard to Enron-related criminal proceedings is being measured by the fact that at least procedural due process has not yet been suspended in regard to those proceedings.

But even where procedural due process is provided, justice and the rule of law are undermined when the government uses its daunting power to criminalize individual behavior that, as Chief Justice Rehnquist put it in Anderson, "is by itself innocuous." As the Chief Justice goes on to explain:

"We have traditionally exercised restraint in assessing the reach of a federal criminal statute, both out of deference to the prerogatives of Congress, Dowling v. United States, 473 U. S. 207 (1985) and out of concern that 'a fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed.' McBoyle v. United States, 283 U. S. 25, 27 (1931)."

Thus, as with its Andersen prosecution, the Enron Task Force had to overreach badly -- distorted application of criminal statutes, suppression of evidence, intimidation of key witnesses, primary reliance on the "shoddy merchandise" of hearsay testimony, etc. -- to make a case against the Merrill defendants in the Nigerian Barge case (the specific circumstances of those abuses are described in my first post in this thread, the Merrill defendants' briefs, and this post). Similarly, as detailed in this earlier post, the list of Enron Task Force abuses in other Enron-related criminal cases is also getting quite lengthy. So, regardless of whether the prosecution of the Merrill defendants was a "witch hunt," it's clear that the government is exercising its formidable prosecutorial powers in the Enron-related cases in a highly troubling manner.

To a large degree, the overreaching nature of these prosecutions is a by-product of the vagaries of pursuing a policy of criminalizing corporate agency costs in the first place. In this excellent TCS Central op-ed, Stephen Bainbridge -- who, along with Professor Ribstein, is one of most cogent scholars on corporate law issues (and one of Vic's colleagues at U.C.L.A.) -- criticizes the type of prosecution of corporate agency costs that Vic views as reasonable in the prosecution of the Merrill defendants:

Few serious persons would deny that fraud and theft are appropriate subjects of the criminal law. When corporate executives loot the corporation, . . . they should go to jail.

Unfortunately, however, ambitious prosecutors have not limited themselves to cases of fraud or theft. . .

Business decisions rarely involve black-and-white issues; instead, they typically involve prudential judgments among a number of plausible alternatives. Given the vagaries of business, moreover, even carefully made choices among such alternatives may turn out badly.

At this point, the well-known hindsight bias comes into play. Decisionmakers tend to assign an erroneously high probability of occurrence to a probabilistic event simply because it ended up occurring. If a jury knows that the plaintiff was injured, the jury will be biased in favor of imposing negligence liability even if, viewed ex ante, there was a very low probability that such an injury would occur and that taking precautions against such an injury was not cost effective.

Hence, there is a substantial risk that juries will be unable to distinguish between competent and negligent management because bad outcomes often will be regarded, ex post, as having been foreseeable and, therefore, preventable ex ante. If liability results from bad outcomes, without regard to the ex ante quality of the decision and/or the decisionmaking process, however, managers will be discouraged from taking risks. If it is true that lack of gumption is the single largest source of agency costs, as somebody once said, rational shareholders will disfavor liability rules discouraging risk-taking, as Judge Ralph Winter opined in Joy v. North:

[B]ecause potential profit often corresponds to the potential risk, it is very much in the interest of shareholders that the law not create incentives for overly cautious corporate decisions. . . . Shareholders can reduce the volatility of risk by diversifying their holdings. In the case of the diversified shareholder, the seemingly more risky alternatives may well be the best choice since great losses in some stocks will over time be offset by even greater gains in others. . . . A rule which penalizes the choice of seemingly riskier alternatives thus may not be in the interest of shareholders generally.

Hence, when juries review the merits of even bad corporate governance, they run the risk of effectively penalizing "the choice of seemingly riskier alternatives."

In sum, shareholders deserve protection from theft, but not from risk taking, . . . Unfortunately, it's not clear that prosecutors know the difference -- or even care.

Yes, Vic, we can agree that this is not as bad as the Inquisition or the Holocaust. But it is still a gravely important issue when the state misuses its overwhelming power to prosecute and convict unpopular people for doing their job, which -- in Mr. Bayly's case -- he had been doing in an exemplary manner for the past 30 years. Even an appellate decision overturning the convictions of Mr. Bayly and the three other Merrill defendants cannot undo the emotional carnage that those men and their families have endured, just as the Supreme Court's decision in Andersen could not breath life back into the 30,000 jobs that were lost as a result of the government's overreach in that case.

However, as great as my compassion is for the Merrill defendants and their families, and as concerned as I am with the economic damage that is resulting from the government's dubious criminalization policy, my greater concern remains for the principles of justice and respect for the rule of law upon which the success of American society is largely based. It is impossible to reconcile the convictions of the Merrill defendants with the results in such cases as the Enron Broadband trial, the Richard Scrushy case, the Arthur Andersen case, the William Sihpol case, the Martha Stewart case, the sad case of Jamie Olis, the DOJ's handling of the Global Crossing case, the Tyco case, the Frank Quattrone case, the Bernie Ebbers case and many others. Accordingly, the roulette wheel-nature of the results in these cases is precisely what casts the public's respect for the rule of law into an ugly cauldron of cynicism, resentment, and tolerance for the abuse of the government's daunting power to prosecute the unpopular people of the moment. That's why when a bright law professor rationalizes a travesty such as the conviction of the Merrill defendants as merely an unfortunate result of an otherwise legitimate use of the state's prosecutorial power, I am concerned that we are well on our way to a time when, as Sir Thomas warns us, we will not be able to "stand upright in the winds" of abusive state power that will blow then.

Posted by Tom at 4:15 AM | Comments (2) |

August 7, 2005

Stros 2005 Review: Checking in on the Stros

Since last checking in on the Stros (60-51), the club has cooled off a bit, losing four of their last seven games. However, the Stros come home for their longest homestand of the season on the uptick, as Jason Lane's (-3 RCAA/.300 OBP/.479 SLG/.779 OPS) three run yak broke open a close game and notched a well-deserved 8-1 win for the Rocket over the Giants (48-62).

The Stros continue to lead in the race for the NL Wild Card playoff spot, and the competition in that race increasingly looks like it will come out of the NL East where the Phillies (58-54), Mets (57-54) and Marlins (57-52) all appear primed to remain in the race. My sense is that the Nationals (58-53) will continue to fade and will be out of the race by Labor Day. Both the Cubs (54-56) and the Brewers (56-56) should both be in the race. However, just like the 2004 season, it appears that Manager Dusty Baker is mismanaging the Cubs sufficiently to keep that club out of the race, and the Brew Crew -- although the most balanced club in the NL except for the Cardinals -- just can't seem to put the long winning streak together that is necessary to get a leg up in the race for the Wild Card playoff spot.

Inasmuch as combining each club's runs created against average ("RCAA", explained here) and its runs saved against average ("RSAA", explained here) is a good measure of each club's strength relative to the rest of the league, here is how the above-named clubs involved in the Wild Card race stacks up:

Marlins 75 RCAA/-13 RSAA = 62
Brewers 48/16 = 64
Stros -27/72 = 45
Mets 10/27 = 37
Cubs 34/-9 = 25
Phillies -36/58 = 22
Nationals -24/24 = 0

Thus, the Marlins remain the Stros strongest competition, but their pitching has been so below average this season that the club's strong hitting has simply not been able to carry the club through a long winning streak. Somewhat surprisingly, the Mets are a well-balanced competition and Carlos Beltran (-1/321/.437/.758) appears finally to be coming around, so keep an eye on that club. My sense is that the Phillies do not have enough firepower to hang in the race, but they have a similar makeup to the Stros (i.e., strong pitching, weak hitting), so who knows?

Here are the Stros hitters' individual RCAA through Saturday's games, courtesy of Lee Sinins:

Morgan Ensberg 32
Lance Berkman 20
Craig Biggio 11
Orlando Palmeiro 10
Jeff Bagwell 1
Eric Bruntlett -3
Jason Lane -3
Luke Scott -4
Todd Self -4
Humberto Quintero -5
Jose Vizcaino -5
Raul Chavez -10
Willy Taveras -10
Mike Lamb -11
Adam Everett -13
Chris Burke -16
Brad Ausmus -17

The Stros team RCAA of -27 remains 11th among the 16 National League clubs. The Stros hitters continue to be well under average as a group, although Ensberg (32/.385/.585/.971), Berkman (20/.407/.502/.909), Bidg (11/.336 /.478/.814), and Palmerio (10/380/.503/.883) continue to highly productive, and Lane has been showing steady improvement over the past month. On the downside, almost every other hitter on the club is terrible, and rookie starting outfielders Taveras (-10/.325/.353/.678) and Burke (-16/.291/.303/.594) have become big drags on the lineup. There is no good reason to play either Taveras or Burke in place of Palmeiro or Lane during a playoff race.

Meanwhile, here are the Stros pitchers' individual RSAA through Saturday's games:

Roger Clemens 46
Roy Oswalt 34
Andy Pettitte 26
Dan Wheeler 14
Brad Lidge 9
Mike Gallo 2
Chad Qualls 2
Mike Burns 1
Chad Harville -2
John Franco -5
Russ Springer -8
Ezequiel Astacio -10
Brandon Backe -10
Brandon Duckworth -12
Wandy Rodriguez -15

The Stros team RSAA of 72 is 2nd among the 16 National League teams. Clemens (1st in NL RSAA), Oswalt (3rd in NL RSAA), and Pettitte (tied for 5th in NL RSAA) remain the strongest three starting pitchers on one team in MLB, while Lidge and Wheeler are one of the strongest closing duos in the National League. Even Astacio has looked like a real MLB pitcher during his past three outings.

By the way, with Sunday's performance, Clemens set the Stros record for single season RSAA:

1 Roger Clemens 2005/ 49
2 Mike Scott 1986/ 47
3 Larry Dierker 1969/ 45
4 Mike Hampton 1999/ 40
5 Darryl Kile 1997/ 39
T6 Roy Oswalt 2002/ 33
T6 Joe Niekro 1982/ 33
T6 Roy Oswalt 2005/ 33
T9 Mike Cuellar 1966/ 32
T9 Roger Clemens 2004/ 32

And in less than 2 full years with the club, he is already 3rd on the Stros career RSAA list:

1 Roy Oswalt 138
2 Billy Wagner 99
3 Roger Clemens 81
4 Mike Hampton 76
5 Dave Smith 75
6 Octavio Dotel 67
7 Nolan Ryan 60
8 Wade Miller 56
9 Don Wilson 55
10 Joe Sambito 53

The Stros open a 13 game homestand on Tuesday against the Nationals, the Pirates (47-65), the Cubs, and the Brewers before making another West Coast swing on August 22. Looks like Houstonians are going to be enjoying yet another late summer pennant race, which has become a delightfully common occurrence during the Stros' Bidg-Bagwell era.

Posted by Tom at 8:58 PM | Comments (0) |

Update on the talented Mr. Munitz

Following on this post from earlier this summer on former University of Houston chancellor, Barry Munitz, this NY Times article indicates that the heat is being turned up on current Getty Trust executive director.

Reporting on a LA Times article from this past week, the Times reports that the California attorney general has opened an investigation into the finances of the Getty Trust, particularly the financial records relating to Mr. Munitz's eight-year tenure. The state is examining whether those expenditures had violated state laws governing its tax-exempt status, as well as a real estate deal between the Getty Trust and L.A. billionaire, Eli Broad, who happens to be one of Mr. Munitz's buddies.

Mr. Munitz is one of the best-paid executives of a nonprofit institution in the nation, with salary, benefits and perks totaling over $1 million annually over the last several years. It appears that everything that Mr. Munitz received was approved by the Getty Board, so it appears that the primary purpose of the investigation is to embarrass Mr. Munitz and the Getty board. My sense is that neither Mr. Munitz nor the Getty board really cares.

Posted by Tom at 4:29 PM | Comments (0) |

August 5, 2005

Another great English obituary

As noted in this earlier post, I am a big fan of the English tradition of writing lighthearted obituaries. This Daily Telegraph obit is another wonderful example of that tradition, as reflected by the opening description of the decedent, former English barrister, Peter Parkenham:

Patrick Pakenham, who has died aged 68, was a talented barrister and the second son of the 7th Earl and Countess of Longford; highly intelligent, articulate and possessed of an attractive and powerful voice, Pakenham could have attained great professional heights, but his boisterous nature and bouts of mental illness rendered it impossible for him to adhere to the routine required to sustain his position at the Bar, and he retired after 10 years' practice.

But that overview is nothing compared to this anecdote:

During his legal career, Pakenham became something of a legend, and, 25 years on, accounts of his exploits are still current. During his appearance before an irascible and unpopular judge in a drugs case, the evidence, a bag of cannabis, was produced.

The judge, considering himself an expert on the subject, said to Pakenham, with whom he had clashed during the case: "Come on, hand the exhibit up to me quickly." Then he proceeded to open the package. Inserting the contents in his mouth, he chewed it and announced: "Yes, yes of course that is cannabis. Where was the substance found, Mr Pakenham?"

The reply came swiftly, if inaccurately: "In the defendant's anus, my Lord."

Read the entire piece, as it only gets better. Hat tip to Is that Legal for the link.

Posted by Tom at 6:31 AM | Comments (2) |

Roger Clemens, medical miracle

The Stros' Roger Clemens -- certainly one of the three greatest pitchers in Major League Baseball history -- turned 43 yesterday. His dominating performance this season at that advanced age for baseball pitchers prompted this Alan Schwarz/ESPN.com article on how medical advances made Clemens' long career possible and saved Clemens from suffering the same fate as one-season wonders from previous eras, such as Mark Fidrych:

[F]or most of baseball history, a "sore arm" was like a malevolent genie who visited pitchers in the night, entered their joints and corroded their futures from the inside with no explanation or recourse. Johnny Beazley, Karl Spooner, Mark Fidrych . . . they all faded into anonymity before medicine could fix them, medicine we now take for granted. When you consider that almost every top modern pitcher has gone under the knife at some point -- heck, some throw harder after ligament-transplant surgery -- you realize what a lucky era we're in.

So lucky that most people forget that Roger Clemens could have been one of those pitchers we never heard from again. It was 20 years ago that he and his throbbing shoulder lay on the operating table -- before any 20-strikeout games, before any Cy Young awards and before arthroscopy was a sure thing. Before Dr. James Andrews was sure he could fix him.

Clemens was closer to the scrap heap than most -- particularly Clemens himself -- care to remember. In 1984, having established himself as one of the top pitching prospects in baseball, he complained about a sore shoulder soon after reaching the major leagues and was sent home to Texas early. The next year, he achingly creaked through several starts, his velocity down, while no one knew quite what was wrong (some Boston writers even questioned the kid's tolerance for pain).

In June 1985, Clemens learned that a shoulder tendon and nerve were rubbing together, causing "the nerve to rise and get as big as shoelaces," Clemens said then. He tried to pitch through it but ultimately couldn't. On Aug. 23, he was told that he had a "flap tear" in his shoulder and was reportedly "devastated" by the news. The only good news was that the arthroscope, which originally had fixed knees in the 1970s, had come far enough that it could be used, instead of the more invasive scalpel, to shave down the damaged tissue.

"We had very little knowledge [about pitchers] -- they hurt and that's about all we knew," recalls Dr. Andrews, who performed the hour-long surgery on Clemens. "We began to arthroscope shoulders and started being able to see what was inside. Roger was one of the early ones."

In fact, Clemens has been such a machine for the past 20 years that many people can't (or don't want to) believe how close we were to losing him. I asked Andrews to consider what might have happened had Clemens been born just 10 years earlier and hurt his shoulder before the scalpel gave way to the arthroscope.

"We probably wouldn't have been able to fix it," Andrews says sadly. "He probably would have fallen by the wayside."

Posted by Tom at 6:01 AM | Comments (0) |

Lee Raymond announces retirement as ExxonMobil CEO

Exxon Mobil -- the world's largest company in terms of market capitalization -- announced yesterday that chairman and CEO Lee R. Raymond, who is 66, would retire at the end of the year after 12 years on the job. As is typical of ExxonMobil's conservative management style, the company also announced that Mr. Raymond will be repaced by native Texan, Rex W. Tillerson, who is 53 and, as ExxonMobil's president, has been a longtime company insider being groomed to replace Mr. Raymond. Here is the company's press release on the change, and here is an earlier post about an interesting interview with Mr. Raymond.

Mr. Tillerson -- who is from Wichita Falls and is a University of Texas at Austin alum with a degree in civil engineering -- has the quintessential tough act to follow. Mr. Raymond managed ExxonMobil into a more successful company in almost every respect, including the successful 1999 merger with rival Mobil Corp. Probably the biggest problem that Mr. Tillerson will face is the sheer size of the type of exploration projects in which ExxonMobil invests. Over the past decade or so, the cost of those projects -- often hundreds of millions -- has grown quickly as producers seek to tap formerly uneconomic reserves. As the increased price of oil justifies even larger investment, the price of those projects will likely grow into the several billions over the next decade. Laying off a large part of projects that size to hedge risk is no easy task.

Posted by Tom at 4:30 AM | Comments (2) |

August 4, 2005

A great dialogue on energy prices

Clear Thinkers favorite James D. Hamilton and Robert K. Kaufmann, professor in the Center for Energy & Environmental Studies at Boston University, are the participants this week in the Wall Street Journal's excellent Econoblog series (it's free!). The topic is the notion of "peak oil" and exploring the economic ramifications of a drop in oil production, and the discussion between these two experts is insightful and informative.

By the way, both men share a disdain for the recently-passed Energy Bill, to which Mr. Kaufman comments:

Policy is needed to help the entrepreneurial spirit anticipate the peak, but we don't need the type embodied in the current energy bill. No serious person can believe that it will help. The current bill demonstrates that Republicans and Democrats have the same view of policy, they just give tax dollars to different groups.

Sound policy should establish an economic environment that increases the economic returns and reduces the risk to long-term research and development on alternative energies. Specifically, policy should impose a large energy tax that is phased in over a long period, perhaps 20 years. Furthermore, increases in the energy tax should be "offset" by reducing other taxes, such as payroll or corporate taxes. Economic studies show that such an approach can generate a "win-win" solution -- reduce energy use (and the environmental damages not paid by users), stimulate research and development on alternative energies, and speed economic growth. Phasing in an energy tax would send a signal to entrepreneurs that there will be a market for alternative energies. The tax does not pick technologies -- that will be left to the market, which is smarter than any Democrat, Republican, or even myself!

And Mr. Hamilton makes the following sharp observation regarding efficient allocation of resources:

It is precisely because I agree with Robert about the importance of this transition [from peak oil] that I think it's critical that we put all our resources to their best use. And I honestly believe that the best way to ensure that happens is to count primarily on the same system that has generated the fantastic improvements in global living standards over the last few centuries, namely, individuals choosing to direct the resources they personally control to those activities that yield the highest personal reward. Yes, the risks are great here, but so are the private rewards to those who best figure out how to navigate our way through them.

In so saying, let me be clear that I distance myself from those who might say that there is nothing to worry about and markets will solve everything. I think there is plenty to worry about, and markets may or may not solve the problems. But what I am saying is that I see private incentives as our best hope. Notwithstanding, I enthusiastically endorse the kinds of active government assistance for those incentives that we've been discussing.

Posted by Tom at 12:34 PM | Comments (1) |

Brain dead woman gives birth

Don't miss Tom Mayo's interesting analysis of the difficulty that the mainstream media has in explaining the context under which Susan Torres, a brain dead Virginia woman, gave birth to a baby girl this past Tuesday. Tom observes about the headline for the AP/Yahoo story:

Once dead, a patient can't die again. But, amazingly, 37 years after the Ad Hoc Harvard Medical School report on "irreversible coma," the public's resistance to the notion of neurological criteria for death is curiously persistent.

Posted by Tom at 9:07 AM | Comments (0) |

"Busted for Yoga"

Ellen Podgor has the blog title of the day in this post on the extension of Martha Stewart's home confinement over at the White Collar Crime Law Prof blog. Money quote:

"We should all feel safer knowing that Martha will be spending an extra three weeks on house arrest."

As readers of this blog know, I believe that Martha was one of the victims of the government's dubious criminalization of business during the post-Enron era.

Posted by Tom at 7:54 AM | Comments (0) |

The legal cost of avoiding an Enronesque experience

Following on this earlier post that addressed the hard-nosed approach that Allied Capital Corporation has taken in attempting to avoid an Enronesque meltdown in the face of an ongoing criminal investigation, this Washington Post article notes that Allied Capital's approach is a financial boon to one sector of the economy that is near and dear to this blogger's heart:

Allied Capital Corp. executives yesterday said the company spent $25 million in legal expenses in the first half of the year on government investigations that have required it to produce "millions of pages" of company e-mails and documents. . .

The [company's second quarter results] results would have been better were it not for $13.5 million in legal and other expenses associated with the investigations during the quarter, with much of the cost related to document production.

Nevertheless, the investment in legal fees appears to be paying off:

Allied Capital stock dropped 59 cents yesterday to close at $27.51. It is up more than $3 since the criminal investigation was disclosed Dec. 27.

Posted by Tom at 7:19 AM | Comments (0) |

The Greenberg White Paper

This post from awhile back noted that former AIG chairman and Spitzer target Maurice "Hank" Greenberg and his legal team are preparing a "white paper" defending Mr. Spitzer's charges of bad accounting at AIG. Here are the previous posts on the saga between AIG and Mr. Spitzer.

Well, the Wall Street Journal has obtained a copy of Mr. Greenberg's white paper, and in this editorial ($), asserts that the paper "makes a compelling case that AIG's new management took financial decisions detrimental to shareholders -- and for no other purpose than to shift blame to past management and kowtow to Mr. Spitzer." Here is the later NY Times article on the white paper. Moreover, Patrick over at Spitzer Watch is having some fun with this latest development, too.

After reviewing Mr. Greenberg's quite reasonable defenses to the litany of Mr. Spitzer's charges, the WSJ editorial concludes as follows:

There are other AIG accounting curiosities, . . . AIG blamed most of this on "former senior management," without any notable evidence. AIG holders might also want to know why the company's longtime auditor, PricewaterhouseCoopers, as well as AIG's audit committee were happy to sign off on many of these items and then change their minds. Or how some of the same people responsible for the previous accounting are now the ones taking credit for a "cleaned up" AIG.

One possible answer is that AIG is the latest example of a company that felt compelled to play along with a prosecutor's attempt to apply new standards, on an ex post facto basis, to previous behavior. Threatened by Mr. Spitzer with the death sentence of a corporate indictment, directors first let Mr. Greenberg go. Then wanting to put the whole saga behind them, new management decided on the familiar strategy of conceding every Spitzer allegation and taking the biggest write-off possible.

What isn't at all clear is how AIG's shareholders have benefited from this. Mr. Spitzer is making up the rules as he goes along -- rather than leaving that job to the legislators and regulators who are charged with it -- and investors are footing the bill. AIG's share price has taken a beating, dropping from more than $73 a share in February to below $50 in April, and recently climbing back above $60. As it seems clear that this accounting flap bears little relevance to AIG's general financial health, the question is how much of the share price drop is therefore due to Mr. Spitzer alone.

Mr. Spitzer and his media friends portray him as a hero to shareholders. The AIG case offers powerful evidence of precisely the opposite.

Meanwhile, Mr. Spitzer continues to rake in the plea bargains.

Posted by Tom at 6:16 AM | Comments (1) |

Discussing the Merrill Lynch defendants' Nigerian Barge appeal

This post earlier in the week on the appeal of the Merrill Lynch defendants in the Enron-related Nigerian Barge case generated quite a bit of traffic and some interesting responses from around the blogosphere.

First, Larry Ribstein complimented the post as an example of how blogs provide a valuable Hayekian information source, a subject on which Larry has written extensively. Subsequently, Vic Fleischer over at the Conglomerate blog excoriated Larry for "fawning" over my post, and then goes on to criticize the post. That prompted Larry to post this response to Vic's post, then Vic commented on Larry's response, and others commented on both Vic and Larry's posts. I encourage everyone interested in the government's criminalization of business to read all of the above for a lively discussion of the issues relating to that policy. This type of give-and-take is one of the blessings of the blogosphere.

But what is particularly interesting to me is Vic's approach to the subject. I do not know Vic, but I have read his posts on Conglemerate and he is an insightful fellow, and his professional pedigree appears to be developing in a quite solid manner. So, Vic is a reasonably sophisticated fellow in regard to the financial and legal issues that are involved in Nigerian Barge case.

Despite that sophistication, Vic harshly criticizes my post based on a combination of misinformation and misinterpretation. Although this is partially explained by the fact that I have had more access to the detailed information relating to the Nigerian Barge case than Vic, I have nevertheless found over the past several years that Vic's reaction is not particularly unusual with regard to virtually anything having to do Enron. As perhaps best reflected by the mildly entertaining but shallow Enron documentary, even intelligent lawyers have a difficult time analyzing Enron-related matters dispassionately. This is unfortunate because Enron represents precisely the type of difficult case for which the legal profession has a special responsibility not to allow public animus toward merely unpopular people to overwhelm justice and the rule of law. Larry Ribstein notes in his response to Vic's post the similar circustances that surrounded the case of Michael Milken back in the late 1980's, and Daniel Fischel examines how public perceptions overwhelmed the rule of law in his fine book about the prosecution of Milken, Payback: The Conspiracy to Destroy Michael Milken and His Financial Revolution (HarperCollins 1995). The same dynamic is at play nowadays in regard to Enron.

Vic relies on misinformation from the beginning of his post:

The basic facts are that Enron "sold" some barges to Merrill Lynch. That is, Enron recognized a "sale" for accounting purposes. Enron could not formally guarantee that they would buy back the barges, but promised to find a third party buyer within six months. From an economic standpoint, the so-called sale starts to look like a loan.

First, Enron did not sell barges to Merrill Lynch. Rather, in a sophisticated transaction (regardless of whether one characterizes it as structured finance), Merrill acquired from Enron common stock in a company that was the parent company of another company that owned the barges. In so doing, Merrill acquired the right to a dividend stream, the source of which was revenue generated by unsecured contracts for the use of the barges.

Moreover, contrary to Vic's suggestion, the transaction was quite risky for Merrill. Heck, Fastow's buddy in crime, Michael Kopper, declined to allow the LJM2 partnership to enter into the transaction at the time that Merrill did because of the unsecured nature of the source of the revenue stream (Kopper subsequently allowed LJM2 to buy Merrill's interest when the deal was improved with security for those underlying contracts). The deal involved extensive documentation and common hedging characteristics, such as political risk and other types of insurance. Now, Vic could not be expected to know all of that because he has not had an opportunity to review the documentation on the deal. But despite that lack of rather basic information, Vic has no problem in characterizing a complicated and risky transaction as a rather simple deal, and then making the remarkable leap that "the so-called sale starts to look like a loan."

Vic goes on in his post to observe the following:

I agree that it's not a slam dunk criminal case. The appeal has a real shot at success, and I'm not at all sure the government made its case. But that's no reason to lionize the defendants.

Well, I'm not sure that characterizing the Merrill defendants as "decent men" is the same as lionizing them, but let's not quibble about that detail. The fact of the matter is that each of the Merrill defendants -- as reflected in the elaborate reports filed by both the government and the defendants in connection with their sentencings -- had never been in any type of trouble whatsoever before the Nigerian Barge case, and each of them had outstanding personal and professional reputations. Again, I don't expect Vic to know that because he does not have access to that information. But what is it about Enron -- resentment of wealth? Enron's hard-nosed business reputation? investment loss? high profile business failure? -- that would prompt an otherwise reasonable person to take offense at calling men decent who have never been in a lick of trouble?

Vic goes on:

The deal stinks. It reeks. In no way is this deal an "ordinary structured finance transaction," as Kirkendall claims.

He follows that up with the following observation contained in a comment to Larry's response to his post:

The transaction was not a typical or ordinary transaction, and calling it "bad finance" still understates the case. Fraud is fraud. Maybe they shouldn't go to jail over it, but it's not crazy to think maybe they should.

With nothing more than a flawed understanding of the deal, Vic now asserts that the Nigerian Barge transaction is a fraud. Was it a typical transaction that any number of public companies use to manage the timing of income? Absolutely, and Vic is much more naive than I think he is if he believes that such is not the case.

Was it a typical transaction for Merrill Lynch? No, and Merrill readily admitted that. But simply because a transaction is unusual for a firm does not make it questionable, much less criminal.

Was it a reasonable business decision for Merrill to invest and potentially lose $7 million in order to maintain and perhaps improve a relationship with the seventh largest public company in the United States, a relationship that was worth $40 million annually to Merrill? Absolutely, and anyone who suggests that such a decision is even close to criminal conduct risks indicting major sectors of the American economy. Shoot, many large law firms commonly write-off fees, cover expenses and make investments with clients in order to maintain or enhance relationships.

Despite all that, Vic deems the question of whether the Merrill defendants are guilty of a crime a close call. If that is the case, then every businessperson involved in reasonably complicated business transactions in the U.S. better add a criminal defense attorney to their personal legal staff immediately. In my over 25 years of specializing in defending complex business transactions, which includes advising dozens of criminal defense attorneys in regard to defending complex business transactions in white collar prosecutions, the Nigerian Barge case is the weakest white collar criminal prosecution that I have seen, and certainly the most egregious example of the government using "shoddy merchandise" and suppressing evidence to criminalize what, at worst, is a risky business deal. If the Nigerian Barge transaction had involved Merrill Lynch and -- rather than Enron -- a debtor-company that was unknown to the general public, the Justice Department would have never pursued this prosecution.

Vic continues:

In an ordinary structured finance transaction, substantial economic risk is shifted away from the seller. I don't think that happened here, and it's the shifting of economic risk that justifies the accounting treatment.

Again, without fully understanding the transaction, Vic blithely concludes that there was no substantial shifting of economic risk in the Nigerian Barge transaction. What would have happened if the barges would have sunk to the bottom of the Atlantic Ocean while Merrill owned them? Is that enough risk? Frankly, that Merrill took on the substantial risk of ownership is clear from the answer to the following simple question: What would Merrill have been legally entitled to recover from Enron if Enron had not fulfilled Fastow's alleged oral promise either to broker a sale of the interest to a third party or buy it back itself?

Answer: Zilch. Under the contract between the parties, both Merrill and Enron confirmed that any prior oral representations (i.e., Fastow's promises) not contained in the deal documents were null and void, and that neither party relied on them in entering into the transaction. This is a standard contractual provision in such deals. But Vic still concludes that Merrill took on no substantial economic risk in the transaction because of Fastow's unenforceable promise.

In a comment, Vic continues his disparagement of the deal:

The evidence suggests, to me, that Fastow promised to buy back the barges, that Merrill Lynch expected him to buy back the barges and did the deal based on that representation, and that Fastow (through LJM) in fact bought back the barges. The phone call is not the only piece of evidence.

Vic's downplaying of the Fastow conference call belies the fact that the call was the crux of the government's case during the trial and final arguments. Similarly, Vic's assertion that Fastow "promised to buy back the barges" and that "Fastow (through LJM) in fact bought back the barges" falls into the same blurring of the transaction that the government engaged in at trial and to which the Merrill defendants now object on appeal. Inasmuch as LJM2 was a third party, its purchase of Merrill's interest did not render Enron's accounting of the gain from the transaction improper, and the government conceded that during the case. However, as the Merrill defendants point out on appeal, that did not stop the government from suggesting to the jury repeatedly during the trial that LJM2's purchase of Merrill's interest was somehow compelling evidence that a crime occurred and that a criminal conspiracy existed.

Vic goes on in his comment:

I noticed, for example, that one of Merrill's memos noted "reputational risk" as a risk factor in the deal. You don't do that with a plain vanilla financing.

Now, this may not add up to a criminal conviction. I have a lot of sympathy for the defendants here -- drawing the line between planning and fraud is hard. If I were on the jury, I might vote to acquit, and the 5th Circuit has a tough case. But we should not pretend that the transaction was perfectly legal or run of the mill. It wasn't, even in the pre-2001 era.

Although I'm glad Vic toned down his initial harsh comments toward the Merrill defendants in this comment, his off-hand reference to Merrill's acknowledgement of "reputational risk" as an indication of wrongdoing is a painful stretch. Reputational risk is an important consideration for any transaction that is done at year end, and management would be heavily criticized for not considering such a risk. Moreover, reputational risk was merely one of at least ten other risks that Merrill management identified and reviewed internally in considering whether to enter into the barge transaction. The existence of such risks -- and Merrill's consideration of them -- underscores the mistaken nature of Vic's contention that risk was not transferred from Enron to Merrill.

But Vic's biggest doozy is the following:

Kirkendall really goes over the top at the end of the post, explaining:

For as Thomas More reminds us, if the courts do not stand up for justice and the rule of law in such cases, "do you really think you could stand upright in the winds [of abusive state power] that would blow then?"

The implicit comparison of the Merrill defendants to a Man For All Seasons makes me want to barf.

My apologies for prompting that barfing reaction, Vic, but that barf was not the result of any "implicit comparison" that I made. Rather, it was the result of Vic's misinterpretion of the point that I made by using Sir Thomas' statement. Rather than comparing the barge defendants to Sir Thomas, my point was to contrast Sir Thomas' wisdom with the government's dubious decision to use its enormous power to bring a flimsy prosecution against four innocent men based on suppression of evidence and appealing to the jury's resentment of Enron.

The context of Sir Thomas' statement was a debate with several family members. Sir Thomas' wife, daughter, and future son-in-law (Will Roper) were urging Sir Thomas -- as England's Lord Chancellor -- to arrest and prosecute Sir Thomas' student, Richard Rich, who had decided to leave Sir Thomas' tutelage in a huff over Thomas' refusal to grant him a political appointment. Although Rich had not committed a crime, it was clear to everyone that the conniving Rich would betray Sir Thomas in the future. So, Sir Thomas' family beseeches him and Sir Thomas engages Roper in the following passage to make his point:

Wife: "Arrest him!"

Sir Thomas: "For what?"

Wife: "He's dangerous!"

Roper: "For all we know he's a spy!"

Daughter: "Father, that man is bad!"

Sir Thomas: "There's no law against that!"

Roper: "But there is, God's law!"

Sir Thomas: "Then let God arrest him!"

Wife: "While you talk he's gone!"

Sir Thomas: "And go he should, if he were the Devil himself, until he broke the law!"

Roper: "So, now you give the Devil the benefit of law!"

Sir Thomas: "Yes! What would you do? Cut a great road through the law to get after the Devil?"

Roper: "Why, yes! I'd cut down every law in England to do that!"

Sir Thomas: "Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man's laws, not God's! And if you cut them down -- and you're just the man to do it, Roper! -- do you really think you could stand upright in the winds that would blow then?"

"Yes," Sir Thomas concludes. "I'd give the Devil the benefit of law, for my own safety's sake!"

In short, even relatively wealthy business executives who had the misfortune of being involved in a business transaction with a societal pariah are entitled to the protection of the rule of law in the face of the overwhelming power of government. Not only for their protection, but for ours.

Update: As usual, Larry Ribstein has additional perceptive observations on these issues.

Update II: And Vic responds with a more thorough analysis here.

I want to digest Vic's post before deciding whether to extend this debate because the issues have already been well-defined and we all have day jobs.

But I do want to make one point regarding Vic's speculation that LJM2 was not a really a third party purchaser of Merrill's interest. As you would expect, the prosecution examined that issue thoroughly before trial because it would have made the prosecution's case easier in many respects against the Merrill defendants if it could have simply contended that LJM2's purchase of Merrill's interest was the same as an Enron buy back.

Despite that incentive, the government concluded that LJM2 was a seperate entity with different ownership from Enron, and the government conceded that fact well before trial. Thus, the government did not contend during the trial that Fastow's involvement with LJM2 made it one and the same as Enron or that LJM2's purchase of Merrill's interest was equivalent to an Enron buy back. However, that pre-trial concession did not stop the prosecution from blurring that very issue during the heat of trial, which is why the Merrill defendants are raising that as an issue on appeal.

Posted by Tom at 5:20 AM | Comments (5) |

August 3, 2005

You knew this was coming for KPMG

This Washington Post article reports that at least 20 former partners KPMG LLP -- including some who were members of its senior management team -- have been informed by the Justice Department that they are targets of the criminal investigation into their role in selling tax shelters over the past decade. Here are the previous posts on the ongoing sagas involving KPMG and other auditors.

As noted in this prior post, the DOJ has been turning up the heat for some time on KPMG, and it is still unclear in my mind whether the firm can survive or will fall into the same trap that enveloped Arthur Andersen. Although it would seem unlikely that the DOJ would pursue an indictment of KPMG after its Arthur Andersen fiasco, experience tells me that this bunch does not always make rational decisions in such matters. As Professor Ribstein noted awhile back, it would be ironic if a truly good criminal case against KPMG (still not established yet) would be undermined by the Justice Department's dubious handling of the prior case against Andersen.

Posted by Tom at 6:43 AM | Comments (0) |

Redstone's Tournament Course opens

Houston-based Redstone Companies' Tournament Golf Course -- the new home course for the PGA Tour's Shell Houston Open Golf Tournament -- opened for play this week, and the Chronicle's Doug Pike gives the 7,500 yard Rees Jones tract a stellar rating in this review. Inasmuch as the new course is central to the Houston Golf Association's plan to revive the Shell Houston Open, which had one of its weakest fields in years during this year's tournament -- I am hopeful that the course turns out to be popular among both Tour players and the golfing public. I am scheduled to play the Tournament Course later this month, after which I will post a review, so stay tuned.

A note to Redstone Golf -- the website for the Tournament Course is about as unimpressive as a website can be, with hyperlinks that do no work and a paucity of visuals of the product. Might want to spend a few bucks to upgrade that resource, which will be the first impression that many folks will have of the facility.

Posted by Tom at 6:24 AM | Comments (1) |

CNOOC folds on Unocal bid

The China National Offshore Oil Corp Ltd. announced yesterday that it is abandoning its effort to acquire second-tier U.S. exploration and production company Unocal Corp, paving the way for Unocal shareholders to accept Chevron's competing bid. Here are the previous posts on the battle over Unocal.

Chevron clearly overwhelmed CNOOC in the political arena of this takeover battle, which ended up discounting the value of CNOOC's superior all-cash bid because of concerns over whether CNOOC could close it anytime soon. Although there will likely be much hand-wringing over the impact to Sino-American economic relations as a result of CNOOC's failed bid, the reality is that CNOOC screwed the pooch on this one.

First, it's not as if CNOOC had not lined up the necessary political and financial resources to do battle with Chevron. CNOOC hired involved White House-connected lobbyists and the usual battalion of Wall Street investment bankers and public relations types. Moreover, CNOOC's CEO, Fu Chengyu, speaks fluent English and studied petroleum engineering at the University of Southern California. So, these folks knew what they were doing.

However, CNOOC allowed Chevron to get a leg up by failing to meet Unocal's March 30 deadline for submitting bids. CNOOC's board resisted Mr. Fu's attempt to meet that deadline, and did not come around until late June. By that time, CNOOC's bid had to overcome not only the Chevron deal, but also a half billion breakup fee in favor of Chevron. When Chevron sweetened its bid recently, many institutional investors were so concerned about CNOOC's ability to handle the federal approval process and close the deal, they began to lean toward taking the bird in the hand rather than the bigger one in the bush. That effectively sealed the fate of the CNOOC bid.

Posted by Tom at 5:23 AM | Comments (0) |

Dynegy continues restructuring plan with big asset sale

Houston-based Dynegy, Inc. announced yesterday that it had agreed to sell its natural-gas-processing business for $2.48 billion to Houston-based Targa Resources Inc., the energy company that private-equity firm Warburg Pincus LLC founded. As a part of the deal, Targa Resources will also acquire Dynegy's storage, transportation, distribution, fractionation and marketing assets.

With this sale, Dynegy becomes solely a power generator that would be a prime acquisition target of other energy companies. The sale is the latest move in a restructuring plan that Dynegy undertook after the company was nearly drawn into its own reorganization case in the the bankruptcy wake of its acquisition target Enron Corp. in late 2001. Last year, Dynegy sold its Illinois Power utility to St. Louis-based Ameren Corp. for $500 million in cash and $1.8 billion in assumed debt and preferred stock.

Posted by Tom at 5:04 AM | Comments (0) |

United Airlines continues to flounder in chapter 11

In a move that almost certainly means that its bankruptcy case filed in December, 2002 will extend well into 2006, United Airlines parent UAL Corp. announced Tuesday that it was delaying the filing its plan of reorganization with the U.S. Bankruptcy Court in Chicago after various interest groups in the case opposed the plan because of its overly aggressive timetable. It is symptomatic of the disheveled financial condition of the airline indurstry that a debtor-company's creditors -- as opposed to its management -- are afraid to push the company out of bankruptcy too quickly. Here are previous posts that comment on the United Airlines saga.

Interestingly, United's labor unions -- one of interest groups that bears a substantial amount of responsibility for United's bankruptcy in the first place -- is largely responsible for the delay in United filing is plan and might just tip the reorganization process in such a way to strap United when it emerges from bankruptcy. Over the past few months, a number of private-equity firms and hedge funds have expressed interest in participating in the airline's refinancing. However, the unions -- which are among United's largest unsecured creditors -- prefer not to give up the equity in a reorganized United necessary to attract such private capital. Rather, the unions support a plan that would leverage the reorganized company with debt that would be used to pay a portion of unsecured creditors' claims. Not surprisingly, United must overcome more than a little skepticism among institutional lenders that it is a prudent investment to risk loaning money to a highly-leveraged carrier coming out of bankruptcy and attempting to compete in the fiercely competitive airline industry.

Posted by Tom at 4:31 AM | Comments (0) |

August 2, 2005

CIBC puts Enron class action settlement amount over the WorldCom record

Canadian Imperial Bank of Commerce announced today that it has agreed to pay $2.4 billion to settle the class action securities litigation against the bank arising out of the demise of Enron Corp. in late 2001. The CIBC settlement is the largest settlement to date in connection with the Enron securities class action (previous settlements are here, here, here, here and here), and pushes the aggregate amount of such settlements a billion over the $6 billion benchmark established earlier this year in connection with the settlements in the WorldCom class action litigation. Here is the Chronicle article on the settlement.

William Lerach -- the lead plaintiffs' lawyer in the Enron class action -- publicly stated in connection with the CIBC settlement that his goal is to have each settling financial institution pay more than previous settlements. That piece of information could not have brought warm and fuzzy feelings to the remaining financial institution defendants in the Enron securities fraud class action, which include Credit Suisse First Boston, Merrill Lynch & Co., Barclays PLC, Toronto Dominion Bank, Royal Bank of Canada, Royal Bank of Scotland, and Deutsche Bank AG.

CIBC previously paid a paltry $80 million to settle SEC civil charges in a December 2003 settlement in which the SEC alleged that CIBC had aided and abetted fraud by entering into about 35 structured finance transactions with Enron between June 1998 and October 2001. Although the SEC alleged that the transactions allowed Enron to boost earnings and mask debt on its financial statements, that settlement was widely viewed in the legal community as a nuisance settlement. CIBC did not admit any wrongdoing in connection with that settlement.

The Enron securities fraud class action generally accuses a group of Wall Street banks and securities firms of misleading investors by facilitating Enron transactions that removed billions of dollars of debt that allegedly should have been reported on the firm's public financial statements. Mr. Lerach has publicly stated that the plaintiffs are seeking more than $40 billion in damages in the case, but the pace and size of settlements to date indicates that the total amount recovered will be far south of that amount. Still, each additional settlement from here on out will increase the new record for the highest amount recovered in a U.S. securities fraud class action against financial institutions.

Posted by Tom at 4:58 PM | Comments (0) |

The Merrill Lynch defendants appeal in the Nigerian Barge case - criminalization of business run amok

The Enron-related Nigerian Barge case has been a frequent topic on this blog as a prime example of the Justice Department's dubious criminalization of common business practices in the post-Enron era. As a result of that questionable policy, four former Merrill Lynch executives -- Daniel Bayly, William Fuhs, James A. Brown, and Robert Furst -- are unjustly facing prison sentences of between 2.5 and almost four years.

Although the former Merrill executives are appealing their convictions, both the U.S. District Court and the Fifth Circuit Court of Appeals have rejected their motions to remain free on bond pending disposition of their appeals. Inasmuch as those motions had substantial merit (see previous posts here and here), and the Nigerian Barge trial was only the second Enron-related case (the Arthur Andersen case was the first) to be tried in the anti-business environment of Houston in the post-Enron era, the denial of those motions without so much as an explanation is highly troubling.

Nevertheless, the Fifth Circuit did at least put the former Merrill executives' appeal of their convictions on an accelerated track for a ruling on the merits. Consequently, the Merrill executives filed their initial briefs in the appeal late last week, and you can download each of the briefs here. To say that they make interesting reading is an understatement.

Inasmuch as the mainstream media has rendered Enron to social pariah status and condemned most anyone who did business with the former seventh-largest company in the United States, the conventional wisdom has blithely concluded that the Merrill Lynch executives must have been guilty of some crime in connection with the Nigerian Barge deal. However, the briefs of the Merrill Lynch executives in the Nigerian Barge appeal reveal a stunningly different picture. Rather than even a questionable transaction, the briefs compellingly portray a typical structured finance transaction that the Enron Task Force decided to criminalize through a brazen web of distortion, inadmissible hearsay, suppression of key testimony, opposition to a defense jury instruction on the key issue in the case, and prosecutorial misconduct. After reading the briefs, one is left with the unmistakable impression that the Justice Department's prosecution of the Merrill Lynch defendants had nothing to do with truth or justice, and everything to do with demonizing four decent men for their misfortune of having been involved in a rather ordinary structured finance transaction with Enron.

The Nigerian Barge case arose out of a now familiar deal in which Enron sold to Merrill Lynch a financial interest in power-generating barges moored off the coast of Nigeria. The sale took place in late in December 1999 so that Enron could book in 1999 the relatively small amount of $12 million of income generated by the sale. According to the government's theory of prosecution, Enron should not have recognized income because the sale of the barge interest was not a "true" sale because Enron -- through it's former CFO Andrew Fastow -- had orally guaranteed to the Merrill executives that, if Enron could not find a third party to "take Merrill Lynch out" of its investment, Enron would itself buy back Merrill Lynch's interest in the barges within six months. Due to this alleged guaranteed Enron "buyback," the prosecutors contended that Enron did not truly part with any interest in the barges and, thus, should not have recognized any income on the sale. Inasmuch as the former Merrill Lynch executives enabled Enron to book the income on the sale, the prosecution's theory is that the former Merrill Lynch executives were guilty of conspiracy and wire fraud.

In response to these draconian allegations, the Merrill Lynch executives had a simple reply -- they freely acknowledged that Merrill Lynch had not wanted to be a long-term holder of an interest in the barges, and admitted that Enron had therefore assured Merrill Lynch that it would be "taken out" of its investment. But the Merrill Lynch executives insisted that Enron had simply assured them that the "takeout" was to be through a sale to a third party and not through any guaranteed Enron buyback. Even the government acknowledged during the trial that Enron was entitled to recognize a sale -- and no crime was committed -- if Enron had simply assurred Merrill Lynch that it would arrange a third party to purchase Merrill Lynch's interest in the barges.

Thus, the entire case turned on the nature of the oral representations that Mr. Fastow made during a late December 1999 conference telephone call that had about a half dozen other participants from Enron and Merrill, including Messrs. Bayly and Furst. In a transparent effort to hide the weakness of its case, the government chose obfuscation over clarity in presenting its evidence on that key call. Incredibly -- and despite the fact that Mr. Fastow is a cooperating witness for the government -- the Enron Task Force prosecuted its entire case against the Merrill defendants without calling a witness who had any first-hand knowledge of what Mr. Fastow said during that key telephone conference. Rather, the prosecution relied on hearsay testimony and hearsay within hearsay regarding the call, and on witness accounts who testified as to their "understanding" of what Mr. Fastow had said, but who could not remember where that understanding had come from. In so doing, the government intentionally confused the critical distinction between a lawful promise to find a third-party purchaser, on one hand, and an unlawful promise of a buyback, on the other. As Mr. Bayly's brief notes on page 30 regarding the testimony of key prosecution witness Michael Kopper:

So which was it, according to Kopper, an Enron buyback or a third-party purchaser? Not even Kopper could keep the two accounts straight, at one point offering both versions in the same breath. Enron, he stated, had to "follow through" on its "promises" -- the promise to repay, to get them repaid[.]" But those are two very different "promises." A "promise to repay" suggests an Enron buyback. But a promise to "get them repaid" suggests a third-party purchase. It should give this Court pause, we respectfully submit, that a theory of prosecution might hang on a nuance in second-hand information so delicate that the witness himself cannot keep the "promises" straight.

To make matters worse, while presenting this "shoddy merchandise," as Mr. Furst's appellate counsel calls it, the prosecutors suppressed Mr. Fastow's pre-trial statements to the government in which he admitted that he indeed had not promised an Enron buyback, but had instead told the Merrill executives that they could have a high level of confidence that Enron could arrange a third party to buy the barges from Merrill. When the Merrill defendants attempted to introduce Mr. Fastow's inconsistent and exculpatory statements under Fed. R. Evid. 806 during the trial, the prosecution again vigorously opposed introduction of that evidence, and the trial court sustained the government's objection. Finally, when the Merrill defendants requested a theory-of-the-defense jury instruction stating that a promise to find a third-party purchaser would not be illegal, the government also opposed the proposed instruction on this crucial issue in the case, and the trial court again sustained that dubious objection.

Thus, despite the almost 400 pages of briefs, the former Merrill Lynch executives' argument is simple. The convictions were based almost entirely on inadmissible hearsay, and even that hearsay evidence was hopelessly confused. Similarly, the District Court's decision to sustain the prosecution's objections to the exculpatory Fastow out-of-court statement and the theory-of-defense jury instruction on the key issue in the case denied the jury from considering important information that was favorable to the Merrill defendants. Finally, the Task Force distorted -- similar to the Task Force's distortion of the obstruction of justice statute in the Arthur Andersen case -- the honest services, money or property, and books and records charges in criminalizing an ordinary structured finance business transaction. In regard to that latter point, Mr. Bayly's brief refers to Judge Easterbrook's classic passage on criminalization of ordinary behavior from his opinion in United States v. Walters, 997 F.2d 1219 (7th Cir. 1993):

According to the United States, neither an actual nor a potential transfer of property from the victim to the defendant is essential. It is enough that the victim lose; what (if anything) the schemer hopes to gain plays no role in the definition of the offense. We asked the prosecutor at oral argument whether on this rationale practical jokes violate 1341. A mails B an invitation to a surprise party for their mutual friend C. B drives his car to the place named in the invitation. But there is no party; the address is a vacant lot; B is the butt of a joke. The invitation came by post; the cost of gasoline means that B is out of pocket. The prosecutor said that this indeed violates 1341, but that his office pledges to use prosecutorial discretion wisely. Many people will find this position unnerving * * * . * * * [T]he idea that practical jokes are federal felonies would make a joke of the Supreme Court's assurance that 1341 does not cover the waterfront of deceit.

As the Enron Task Force's growing legacy of misconduct continues, it has become abundantly clear that its purpose is something other than to uncover the truth regarding Enron. This was brought home again this past Friday afternoon in a seemingly innocuous exchange during a status conference in the Task Force's legacy case against former Enron chaiman Ken Lay, former Enron CEO Jeff Skilling and former chief accountant, Richard Causey. U.S. District Judge Sim Lake asked the lawyers on each side of the case whether they would prefer to sit during the upcoming trial at the table in the courtroom that is closer to the jury box. Mike Ramsey, Mr. Lay's counsel, piped up and stated that the defendants preferred the table closer to the jury box because -- due to the way in which the tables in the courtroom are situated -- the other table would not require witnesses to look at the defendants (and vice versa) while they were testifying. Although giving no reason for wanting to deny the defendants this basic part of their right to confront witnesses against them at trial, the Task Force prosecutors opposed the defense's request for the table closer to the jury. Judge Lake has not yet decided which side will get the table, but the Task Force's knee-jerk response reflects that their true purpose is something other than to assure that the defendants receive a fair trial.

Accordingly, after fumbling the Arthur Andersen appeal, the Fifth Circuit now has two high profile opportunities -- the Nigerian Barge appeal and the Jamie Olis appeal -- to redeem itself and send the Justice Department a clear message that the federal judiciary will not countenance distortion of criminal statutes and evidence even when the defendant is an unpopular business executive. For as Thomas More reminds us, if the courts do not stand up for justice and the rule of law in such cases, "do you really think you could stand upright in the winds [of abusive state power] that would blow then?" In the Nigerian Barge case and the Enron Broadband case, the Enron Task Force is showing us precisely what happens when such winds blow, and the emotional carnage being experienced by the individuals involved and their families is not something that can easily be overlooked as a trade-off of an imperfect system.

Posted by Tom at 10:22 AM | Comments (2) |

Kinder Morgan's big Canadian deal

Houston-based pipeline operator Kinder Morgan Inc. announced a big bet Monday on the development of the Western Canadian oilfields -- the purchase of Vancouver-based Terasen Inc. for $3.1 billion in stock and cash and the assumption of $2.5 billion in debt.

Terasen is the largest natural-gas operator in British Columbia and operates pipelines that connect Alberta, Canada with the Midwestern part of the U.S. and the Canadian West Coast. Kinder Morgan is paying a premium price for the company, almost 24 times Terasen's estimated 2005 earnings.

Kinder Morgan is a huge pipeline operator, with about 35,000 miles of natural-gas and oil pipelines across North America and another 150 or so storage terminals. But this is its first foray into the quirky oil-sand deposits of Alberta, Canada that hold second-largest deposit of oil in the world. Producing and refining this type of crude oil is more expensive than producing and refining most other types of crude, but recent high oil prices suggest that the long-term price necessary for profitable extraction of the oil-sand deposits has finally been achieved.

The transaction reflects that a major player in the pipeline industry is betting that the current high prices will last long enough to sustain development of the fields. Kinder Morgan expects that oil-sands production will increase from one million barrels of oil a day to two million during the next decade, which in turn will generate a need for the midstream and pipelien infrastructure that Kinder Morgan plans to build. Midstream is the gathering and processing of oil and gas that takes place between production from rigs in the field and the large interstate pipelines that carry oil and gas to consumers.

The "Kinder" of Kinder-Morgan is Richard Kinder, the former president and chief operating officer of Enron Corp., who left in 1996 to establish Kinder Morgan after being passed over as Kenneth Lay's replacement as Enron's chief executive officer.

Posted by Tom at 4:30 AM | Comments (0) |

August 1, 2005

Why you should be skeptical of stock analysts

Most readers of this blog already have a healthy skepticism of the opinions of stock analysts. But for those who don't, please read this NY Times article on several bullish analyst opinions on that black hole of financial loss, the airline industry.

It takes a fairly fertile imagination to reconcile the following excerpt from the Times article with these recent items (here and here) on the airline industry:

[D]eep losses at Delta Air Lines do not deter Jamie Baker, an airline analyst at J. P. Morgan. He maintained an overweight rating even after Delta's shares were pummeled last week on a fresh warning from its chief executive, Gerald Grinstein, that the airline's cost-cutting plan was not enough to offset the impact of brutal competition. Delta lost $388 million during the second quarter, and has lost nearly $10 billion this decade.

Without building cash, and without the passage of pension reform legislation now in Congress, Delta was virtually assured of a bankruptcy filing, Mr. Baker conceded in a research note.

Nevertheless, he wrote, "Our call remains that Delta will manage to pull some liquidity strings, make one last and perhaps final run at avoiding Chapter 11, and successfully limp into 2006 while hoping for lower oil prices and improved revenue trends."

Despite such speculation, stick with Warren Buffet's analysis of the airline industry. After a particularly unfulfilling investment experience in airline stocks several years ago, Mr. Buffett undertook a study of the airline industry. Taking into consideration the airline industry's cumulative finances since the day the Wright Brothers took off at Kitty Hawk in 1903, Mr. Buffet concluded that the industry has been, on the whole, utterly unprofitable. In hindsight, Mr. Buffett wryly observed that shooting down the Wright Brothers on that beach would have been a reasonable financial, if not moral, move.

Key tip on airline stocks -- wait for Professor Ribstein's proposed solution to occur before taking a flyer on any airline stock other than Southwest.

Posted by Tom at 5:04 AM | Comments (0) |

July 31, 2005

The psychology of light rail

Tory Gattis (Houston Strategies) recently authored this insightful post that explores the vexing question of why many people passionately support light rail in the face of the overwhelming economic arguments against it? Tory concludes that it has something to do with an unexpressed human psychological need to be liked -- sort of like, "Here, check out and play with my light rail toy, and you will probably think better of me."

Tory is clearly on to something in that there appears to be an element of a civic inferiority complex underlying some folks' support for light rail. However, Tory's point still does not explain why people who need mass transit the most -- i.e., folks who cannot afford the cost of buying and maintaining a car -- support light rail, which certainly does not improve their mobility and, by drawing resources away from mobility projects that would, probably harms it.

My sense is that that question lies somewhere between the human demand for entitlement and lack of viable choices. As previously noted on this blog, the true economic benefit of light rail is highly concentrated in only a few interest groups -- political representatives of minority communities who tout the political accomplishment of shiny toy rail lines while ignoring their constituents need for more effective mass transit, environmental groups that are striving for political influence, construction-related firms that feed at the trough of light rail projects, and private real estate developers who enrich themselves through the increase in their property values along the rail line. Inasmuch as none of these reasons for mass transit appeal to the part of the electorate who actually need mass transit, this amalgamation of interest groups continues to disguise their true interests behind amorphus claims that the uneconomic rail lines reduce traffic congestion (they do not), curb air pollution (they do not), or improve the quality of life (at least debatable). The literature on all this is public and volumnious -- check out demographia.com, cascadepolicy.org, and americandreamcoalition.org.

So, how do these interest groups get away with this? The costs of such systems are widely dispersed among the local population of an area such as Houston, so the many who stand to lose will lose only a little while the few who stand to gain will gain a lot. As a result, these small interest groups recognize that it is usually not worth the relatively small cost per taxpayer for most citizens who do not use mass transit to spend any substantial amount of time or money lobbying or simply taking the time to vote against an uneconomic rail system.

Meanwhile, the light rail interest groups garner support for light rail from the part of the electorate that actually needs mass transit by simultaneously limiting the mass transit choices and threatening that part of the electorate with loss of the governmental funds for mass transit if they fail to support light rail. Thus, a referendum on mass transit issues is never promoted with choices between alternatives such as a light rail system, one one hand, and a cheaper and more effective bus-based system system, on the other. It's simply an "all or nothing" choice, and folks who need mass transit will understandably vote in favor of getting their share of public transportation funds even if it does not improve their mobility one iota. Indeed, given the cost of light rail systems, one wonders how those citizens who actually need mass transit would vote if the alternative were a light rail system, on one hand, and a new Toyota Prius for each such citizen, on the other? Frankly, the cost of the latter alternative would likely be cheaper than most any light rail plan.

So, at the end of the day, where does that leave us? Is it wrong that people who need mass transit vote in favor of something that does not really address their needs? No, it does not, but it troubles me when they are misled in doing so. As Anne Linehan and Kevin Whited (blogHouston.net) have repeatedly pointed out, a part of Metro's pitch for its light rail plan was that light rail would enhance Metro's bus system and service. Inasmuch as that representation has turned out to be patently false, it seems reasonable that our public officials should at least be required to point out publicly that Metro's most utilized and efficient mass transit system -- i.e., the bus system -- will likely continue to erode as Metro continues to invest heavily in light rail.

In the meantime, it would also be nice if public officials would admit publicly that the usual economic justifications for light rail are also dubious. If mass transit users and other citizens want to allow Houston's public officials to continue to throw money at a light rail system in the face of the economic truth about such a system, then I can live with that result despite my compassion for those citizens who are not being provided the mass transit that they need. But at least let's require truth in advertising in connection with having citizens vote on such matters. A similar sentiment is shared in this interesting Owen Courr?ges post (Lone Star Times) in which he takes the Chronicle to task for suggesting that Metro's political opposition -- rather than Metro itself -- is misleading the public about Metro's expanded light rail plan.

Finally, Tory points out that we should take some comfort in the fact that Houston's light rail plan is at least not as big an economic boondoggle as similar plans proposed for Seattle and Denver. Similarly, a couple of commentators to Tony's post chime in that the marginal cost of the light rail system to Houston area citizens is relatively small for a civic asset that will impress citizens and visitors alike for many years to come. That latter point may have some validity, but let's make sure that we are talking about the correct marginal cost.

A big difference between the light rail system and the publicly-funded stadiums that Houston has built over the past several years are that the stadiums have tenants who pay the vast majority of the cost of maintaining the facilities. In comparison, Metro's light rail system does not come close to generating enough revenue to pay its ongoing costs, as was brought home by Metro's recent announcement of desultory operating results coupled with the expenditure of $104 million more on the three-year-old rail line to fix problems caused by construction errors and add more rail cars. In that regard, even the $1.5 million that Harris County spends annually to mothball the Astrodome pales in comparison to underwriting the ongoing cost of the light rail system. The bottom line is that light rail systems eat voraciously, and any analysis of the true marginal cost of such a system to citizens has to take into consideration the high cost of feeding that appetite.

Posted by Tom at 12:45 PM | Comments (4) |

Daniel Yergin comments on energy prices

Daniel Yergin -- energy economist and author of the 1992 Pulitzer Prize winner, The Prize: The Epic Quest for Oil, Money, and Power -- writes this sensible Washington Post op-ed in which he reminds us that the current relatively high prices of energy do not mean that the end of the oil age is right around the corner:

Prices around $60 a barrel, driven by high demand growth, are fueling the fear of imminent shortage -- that the world is going to begin running out of oil in five or 10 years. This shortage, it is argued, will be amplified by the substantial and growing demand from two giants: China and India.

Yet this fear is not borne out by the fundamentals of supply. Our new, field-by-field analysis of production capacity, . . . is quite at odds with the current view and leads to a strikingly different conclusion: There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day -- from 85 million barrels per day to 101 million barrels a day -- a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand.

Read the entire op-ed, and then recall Exxon/Mobil CEO Lee Raymond's observation during a Wall Street Journal interview earlier this year regarding Chevron's bet of continued high energy prices that underlies the high price it is paying for Unocal:

WSJ: What do you think of ChevronTexaco's decision to acquire Unocal?

Mr. Raymond: I can never remember an industry consolidating at high prices. But I can remember an industry consolidating at low prices.

WSJ: Some people think prices will keep going up.

Mr. Raymond: Maybe. I'll bet they'll be lower at some point.

Posted by Tom at 9:43 AM | Comments (0) |

More Spitzer mischief

When one door for a misguided investigation closes for Aspiring Governor Eliot Spitzer, he just opens another one. Although misdirected, no one can say that Mr. Spitzer is not persistent.

On Thursday, U.S. District Judge Sidney Stein of the Southern District of New York denied Mr. Spitzer's request for more information from the Office of the Comptroller of the Currency as a deadline approaches for Mr. Spitzer to respond to the OCC's recent lawsuit against him. The OCC is seeking an injunction against the Lord of Regulation from using his subpoena power to obtain nonpublic credit score and loan information from national banks that are involved in the sub-prime mortgage market.

Meanwhile, in public filings made on Friday, Moody's Corporation disclosed that Mr. Spitzer's office had issued subpoenas in May seeking documents and other information about the ratings of certain mortgage-backed securities and credit enhancement evaluations that the company conducted between 2000 and 2003, and also requested information more recently related to Moody's ratings of the financial strength and subordinated debt of reinsurance companies going back to 1999. Guess which other Spitzer investigation that latter request relates to?

Although one can only speculate as to Mr. Spitzer's purpose in all of this, my bet is that he is developing a theory that American International Group, Inc., Berkshire Hathaway's General Reinsurance Corp. and other reinsurance companies misled Moody's and the other rating agencies -- who then turned around and misled the investing public -- regarding the true financial nature of the finite risk insurance transactions that have been the focus of Mr. Spitzer's witch hunt of AIG and Maurice "Hank" Greenberg.

Given the large number of Mr. Spitzer's witch hunts of various business interests these days, Moody's and the other rating agencies will probably soon begin issuing ratings on the quality of his various investigations. Then, Mr. Spitzer could investigate the rating agencies' ratings of his investigations. The loop would be complete.

Posted by Tom at 5:00 AM | Comments (0) |

July 30, 2005

Lakewood and Houston's other big churches

This Church Report article -- The 50 Most Influential Churches -- examines the fifty largest churches in the United States based on a survey that was sent to 2,000 church leaders with the goal of ranking the nation’s fastest growing churches and churches with more than 2,000 weekend attendance.

Houston is well-represented on the list, with Lakewood Church ranking fifth (are there really four churches that are larger than one that holds its services in a renovated basketball arena?), Fellowship of The Woodlands at no. 17, Second Baptist Church at no. 33, and Windsor Village United Methodist at no. 43. The common thread through all of these mega-churches is that each of them is closely associated with a charismatic leader, and that is certainly true of the Houston contingent -- Joel Osteen at Lakewood, Kerry Shook at Fellowship, Ed Young at Second Baptist, and Kirbyjon Caldwell at Windsor Village.

Lakewood Church made news waves throughout the country last week when it held the grand opening of its new renovated facility, which the Houston Rockets' NBA basketball team used to use as their arena. From 1975 until Lakewood took over, the arena was known first as "The Summit" and then "Compaq Center" for 30 or so years before the Rockets moved the new Toyota Center downtown a couple of years ago.

Despite the rather obvious difficulty of reconciling the essential Christian tenets of sacrificial atonement with Lakewood's lavish new digs and projected $75 million annual budget, Lakewood's opening of its new facility was glorified by fawning local news media, which included numerous lengthy local television "news" reports from the facility touting how wonderful everything is about Lakewood.

Now, that may well be true, but it's also important to know that Lakewood's approach is not universally admired, even within Christian circles. In this post over at the Reformation 21 blog, Rick Phillips expresses his reservations about Lakewood, including the following:

For all the supposed praising of God, it was all about man: namely, Osteen (plus his father, his lovely wife, and his well-behaved children). Osteen’s wife stood before the vast throng and heaped praise upon her husband for ten minutes. The message: What a great man he is, and if you become like him you can be great, too – in your own little way. Then came Osteen’s sermon. It was all about his father’s example of faith and optimism, which he has exemplified and which resulted in the triumph of having enough money to lease a huge arena. There was almost no reference to the Bible and absolutely no Bible teaching. At one point, I opened my Bible during this litany of self-praise and read aloud the parable of the Pharisee and the tax collector. See if you can guess which one was Osteen. "Lord, I thank you that I am . . ."

Certainly seems as if someone in the Houston's news media could have asked Reverend Osteen at least one question about that small issue last week, don't you think?

For an evalution of Mr. Osteen's approach from a theological perspective, see this piece.

Posted by Tom at 5:17 PM | Comments (6) |

Trouble in Nuevo Laredo

Following on earlier posts on the same topic here and here, this article reports on an ominous development that flies under radar screen of most Texans and Americans -- the increasing violence in the Mexican border towns along the Texas-Mexico border.

Tony Garza, the U.S. ambassador to Mexico, ordered the closure of the U.S. Consulate in Nuevo Laredo for a week Friday night to assess the security situation just hours after rival drug cartels engaged in a gunfight with machine guns, grenades and rocket launchers in an upscale Nuevo Laredo neighborhood. The battle was fought Thursday night at a single-story house near a country club, which is about five blocks from the Nuevo Laredo's main drag.

The Texas-Mexico border area of Texas -- called the Rio Grande Valley or simply "the Valley" -- has always been a fascinating and troubling part of Texan culture. The area is among the lowest in terms of per capita income in the United States, yet even the chronically depressed economy of the Texas side of the border is a fantasy of riches for many of those living in the poverty of the teeming Mexican border towns. The following is the way I characterized the area's problems in this earlier post:

The region's problems are complex and difficult, which makes the area prone to being ignored. The increased violence of late is the natural result of such neglect, and the usual response to such spikes in violence along the border -- i.e., heightened law enforcement -- is only a short term solution that often contributes to the animus that many of the Hispanic citizens of the area have toward the state. The area is desperate for leadership and a vision for solving its problems, yet those intractable problems tend to repel those in government who are in a position to do something about them. In short, the Valley needs statesmen, which are in short supply in the polarized American political landscape of the early 21st century.

With some politicians calling for the creation of state militia units to combat the increasing problems on the border, it's high time for federal and state leaders to address the problems facing the Valley and devise short and long-term plans to address them. For if they do not, expect to see what happened in Nuevo Laredo on Thursday night to spill over to the Texas side of the border soon.

Posted by Tom at 7:25 AM | Comments (0) |

Eric Andell gets probation

Former Houston district and appeallte judge Eric Andell -- who formerly served as deputy undersecretary under fellow Houstonian Rod Paige at the U.S. Education Department -- was sentenced to one year of probation and fined $5,000 Friday after pleading guilty to charges that he intentionally had the federal government pay about $9,000 for travel in which he conducted personal business and worked as a visiting judge while still employed at the Department of Education. Here is a previous post on the matter and here is the Chronicle story on the sentencing.

One of the most popular local Democratic politicians, Mr. Andell is a genuinely good man who made a mistake and owned up to it in a responsible manner. That he avoided any prison time is a just result.

Posted by Tom at 6:59 AM | Comments (0) |

Stros 2005 Review: The Stros are streaking again

Last season, after falling to a season-worst 56-60 record on August 14th, the Stros won 36 out of their next 46 games, a run that included 12 and seven game winning streaks, the latter of which ended the regular season and clinched the National League Wild Card playoff spot. That club went on to get within a few outs of the World Series.

With another win in last night's game, this Stros club -- after falling to a season-worst 15-30 record on May 24th -- has gone 41-17, won six games in a row and won 12 of their last 13. The Stros now lead in the National League Wild Card race by one game and are in second place in the NL Central, 8.5 games behind the Cards. Given the way the NL Central race has gone the past couple of seasons, that equates to a pennant race.

Given this club's weak hitting, the Stros will not be able to sustain this level of play for the remainder of the season. But make no mistake about it, this has been an incredible run, even more remarkable than last season's.

Posted by Tom at 4:45 AM | Comments (1) |

July 29, 2005

More on the gas trader cases

This Southern District U.S. Attorney Office press release announces that two former gas traders -- former Dynegy trader Michelle Valencia and former El Paso trader Greg Singleton -- had counts added to their pending indictments in connection with a series of criminal cases in which the government alleges that the traders reported bogus trades to industry newsletters to affect the price of natural gas. Here is a previous post on Ms. Valencia's case and other posts on the gas trader prosecutions may be reviewed here, here, here, here, here and here.

These particular trader cases involve alleged efforts to manipulate the trading indexes, which are used to value billions of dollars in gas contracts and derivatives. Industry publications, such as Inside FERC Gas Market Report, use data from traders to calculate the index price of natural gas. Accordingly, movement in index prices often affects the level of profits that traders can generate. In these particular cases, it remains unclear in what context the allegedly false information was provided or whether the publication actually used any such false information. However, the government is contending that it needs only to prove that fake trades were reported to the publications and not that the trades were actually published or affected the markets.

Ms. Valencia and Mr. Singleton were originally charged with "conspiracy, false reporting, and wire fraud related to the transmission of allegedly inaccurate trade reports to industry newsletters which used the reported trades to calculate the 'index' price of natural gas in August 2000," and the superseding indictment adds "additional counts of false reporting and wire fraud relating to inaccurate trade reports used to calculate the 'index' price of natural gas in July 2000."

As noted in this previous post, it would appear that this is a fairly transparent effort by the government to increase the alleged market loss attributable to the alleged false reporting for purposes of seeking longer jail terms against Ms. Valencia and Mr. Singleton. Justice Department lawyers have been making some fairly preposterous positions on that particular issue in other cases recently.

Posted by Tom at 12:26 PM | Comments (0) |

Conglomerate forum on the corporate case of the decade

Gordon Wood over at the Conglomerate blog has put together an impressive list of expert contributors for an upcoming forum on the widely-anticipated decision of the Delaware Chancellory Court in the corporate case of the decade -- i.e., the civil lawsuit over The Walt Disney Co. board's decision to pay Michael Ovitz a rather generous severance package for essentially doing nothing during his short stay at Disney (earlier posts on the case are here, here, and here).

As Professor Wood notes, now all we need is a decision, which was expected before the end of July, but has now apparently been pushed back. My speculation is that the decision was close to completion when Professor Ribstein posted his recent prediction on the decision, which sent Chancellor Chandler and his clerks scampering back to the drawing board. ;^)

Seriously, though, the Conglomerate forum is yet another example of the way in which the blogosphere is redefining the way in which information is delivered to the public. Prior to the blogosphere, the only way that one could obtain the type of expert analysis that such a forum delivers would be to luck upon an op-ed in a newspaper or dig through stodgy law review articles. Now, that analysis is delivered in an efficient and effective manner for the world to peruse. That's a remarkable development, and one that all of us should be careful not to take for granted.

Posted by Tom at 7:19 AM | Comments (0) |

Judge Roberts and Rome

Over time, politicians will manage to stand just about any issue in American politics on its head.

Houston played host to one of the most important speeches of John F. Kennedy's 1960 Presidential campaign. Conventional political wisdom at the time was that a Catholic could not be elected President of the United States because of Protestants' perception that a Catholic would have to obey the Pope's commands over those of the U.S. Constitution. Mr. Kennedy finally decided to address the issue head-on, and on September 12, 1960, he delivered this statement to the Greater Houston Ministerial Association, in which Theodore White observed that "he knocked religion out of the campaign as an intellectually respectable issue."

Despite Mr. Kennedy's victory in the 1960 election, anti-Catholicism in American politics was not eradicated. This fact was reflected again earlier this week when Sen. Richard Durbin (D., Ill.) supposedly asked Supreme Court nominee John R. Roberts, Jr. during an informal interview "what he would do if the law required a ruling that his church considers immoral" and Sen. Durbin reported that Judge Roberts supposedly answered that he would consider recusal. Although Sen. Durbin quickly backpedaled, but, in the meantime, Jonathan Turley wrote this over-the-top L.A. Times op-ed (free regis. required) that challenged his "fitness to serve as the 109th Supreme Court justice" over that response. The L.A. Times followed that op-ed with this confusing editor's note, which noted the following about Mr. Turley's story regarding Judge Roberts' supposed recusal answer to Sen. Durbin's question:

Tuesday, Durbin's office said the story was inaccurate.

Aides acknowledged that a question about faith and public policy had been asked, and that Roberts had discussed recusals ? but they said that the recusal answer wasn't in response to the question about faith.

Turley, however, says it was Durbin who gave him the original information in an on-the-record conversation. Turley says he then confirmed the substance of that conversation with another person who had been at the meeting.

Amidst all that confusion, Douglas W. Kmiec -- a Constitutional Law professor at Pepperdine University and the former dean of The Catholic University of America School of Law -- straightens everything out in this Opinion Journal op-ed. After noting Sen. Durbin's confusion and the fact that a religious litmus test for Supreme Court nominees would violate Article VI of the Constitution (the prohibition of religious oaths) and the First Amendment's free-exercise guarantee, Mr. Kmiec notes as follows:

Yes, the Catholic Church is a defender of life. It has even issued statements that sound suspiciously like a certain famous declaration of self-evident truth -- that we are all created equal, with an unalienable right to life. But the church is also resident in a world where Supreme Court precedent has tragically elevated personal preference over any once-proud declaration of right. What does the church expect of public officials in such an environment?

First and foremost, to be observant of church teaching in one's personal life. The church asks Judge Roberts and his fellow parishioners to pray to end abortion and, in social outreach, to create the conditions that make it less pressing. The church seeks to convert individual souls to the love of God and neighbor; it has no armies to compel either.

Yes, the late Pope John Paul II admonished Catholic public officials to work legislatively to limit abortion -- something that even most Democrats proclaim to be doing at least during general elections. But there is not one iota of church teaching demanding that a judge or justice exceed the scope of his office to undo, on solely religious grounds, the public law of abortion or any other matter.

And, in explaining why a Catholic need not recuse themselves from judging the legality -- as opposed to the morality -- of abortion or the death penalty, Mr. Kmiec observes as follows:

These are matters of constitutional, not moral, authority. When [Sir Thomas] More was asked why he didn't arrest a man directly for being "bad," he replied . . . that, though he set man's law "far below" God's, he was most certainly "not God," and he wanted to draw "attention to [that] fact."

"The currents and eddies of right and wrong, which [others] find such plain sailing," More said, "I can't navigate . . . But in the thickets of the law, oh, there I'm a forester. I doubt there's a man alive who could follow me there, thank God."

As with Sir Thomas, there are few matches for Judge Roberts in those "thickets of the law," which is where Democrats would be wise to evaluate Judge Roberts.

Meanwhile, while on the abortion issue, Todd Zywicki over at the Volohk Conspiracy notes that Fifth Circuit Judge and Clear Thinkers favorite Edith Jones' recent opinion in the McCorvey case -- noted in this earlier post -- was really more about stare decis than abortion.

Finally, did you know that Professor Zywicki has the first selection in his Fantasy Football League?

Update: Don't miss Professor Bainbridge's thoughtful analysis on Justices' religious faith and their legal decisions.

Posted by Tom at 6:09 AM | Comments (1) |

The IRA's announcement

In a potentially significant step that could end over three decades of violence in Northern Ireland and on the British mainland, the Irish Republican Army has ordered its members to discard their weapons. As noted in this earlier post, the I.R.A.'s continued use of terrorism in attempting to achieve its political goals -- and some United States politicians' often ambivalent stance toward it -- represented one of the more troubling hypocrocies of the U.S.'s current War on Terror.

More than 3,000 people have died since Northern Ireland's "Troubles" began in the 1970s, about two thirds of which were the result of IRA-sponsored incidents. The purported goal of the IRA's campaign of violence to reunite Ireland and win independence from Great Britain. Despite that, IRA violence hasn't been the top priority of U.K. security forces for several years. In 1994, the IRA declared a cease-fire in its war to force Britain out of Northern Ireland, but that cease-fire was violated when the IRA set off a huge bomb in London's docklands financial district in 1996. Nevetheless, since a comprehensive peace deal in 1998, the only further attacks have been by IRA splinter groups. Political authority was shifted from London to a Northern Irish assembly in which Sinn Fein -- the IRA's political wing -- briefly shared power with Northern Ireland's majority Protestant parties, but the IRA's failure to lay down its arms had prompted Northern Ireland's mainly Protestant Unionist parties to continue objecting to Sinn Fein's involvement in the government.

The United Irelander has some thoughts here on how the various interest groups in the U.K. are reacting to the IRA's announcement.

Posted by Tom at 5:18 AM | Comments (2) |

"It's nowhere near as bad as the one a few months ago"

The comment that serves as the title of this post qualifies as genuinely good news these days at BP p.l.c. However, as noted in this post from just the other day, it is getting a bit difficult to keep up with BP's various problems these days.

Another fire erupted at BP's Texas City plant Thursday evening, just four months after the one in March this year that caused 15 deaths and dozens of injuries. No injuries were reported in Thursday's fire that took place in BP's Texas City 1,200-acre complex, but not close within the complex to the unit that exploded in March. BP released a statement saying that "there is no connection between the two incidents."

Meanwhile, crude-oil futures settled up nearly a dollar to push prices above $60 a barrel for the first time in more than two weeks.

Posted by Tom at 4:33 AM | Comments (0) |

July 28, 2005

And you thought Tropical Storm Allison was bad?

During a five day period from June 5th through the 9th in 2001, Tropical Storm Allison dumped a huge amount of rainfall on the Houston metropolitan area that caused widespread and tremendously damaging flooding. The Port of Houston recorded 37 inches of rainfall over that five day period. With damage estimates exceeding $5 billion, Allison remains the costliest weather event in Houston's history.

However, as bad as Allison was, it's hard to imagine that this Indian monsoon hit Bombay with 37 inches of rain in one day as "the rainfall descended in what looked like a solid wall of water."

Posted by Tom at 9:13 AM | Comments (0) |

Kelo ripples hit the Cowboys stadium project

As noted in this earlier post, the U.S. Supreme Court's recent decision in Kelo v. City of New London inevitably will have ripples, including the use of government's eminent domain power to increase the value of privately-owned professional sports franchises at the expense of private property owners.

Thus, it is not surprising that Arlington landowners have filed the first lawsuit over the City of Arlington's use of its eminent domain power to seize the landowners' land for the benefit of Jerry Jones and his Dallas Cowboys stadium project. The landowners contend that the stadium project -- although tacitly owned by the City -- is beneficially owned and certainly controlled by Mr. Jones through a long-term ground lease, and that using the government's eminent domain power to take private property from one person and give it to another is unconstitutional. Sounds like Kelo II, doesn't it?

In essence, this litigation is over who should be negotiating the sales price of the landowners' property -- Mr. Jones, who does not have the threat of eminent domain power, or the City of Arlington, which does? Inasmuch as Mr. Jones does not have as good a bargaining position as the City, the lawsuit brings into focus the key defect in the Kelo decision -- the shifting of leverage in negotiation over land prices in favor of the private developer and away from the landowner.

My sense is that this lawsuit and others similar to it will likely settle long before the legal issue ever gets to trial or an appellate court because the cost of such settlements is a fraction of the overall cost of the project. But that does not change the fact that the Supreme Court made a serious error in Kelo by holding that a "reasonably well thought out plan of [private] economic development" that may generate jobs and taxes for a local government is enough to trigger the government's use of eminent domain to hand over private land to a developer. In so doing, the Supreme Court has replaced the efficiency of market forces with the expediency of government fiat, which is why we have economic boondoggles such as those described in this post.

Craig Depken -- who has the best compendium of posts regarding the Cowboys stadium project -- has further astute thoughts here.

Posted by Tom at 7:11 AM | Comments (1) |

A personal experience with Judge Roberts

Although I do not agree with the writer's conclusion, this post tells a personal story about Supreme Court nominee John G. Roberts, Jr. that reflects why he is one of my favorites for a spot on the Supreme Court and certainly will not result in this type of embarrassment. Hat tip to Craig Newmark for the link to the post on Judge Roberts.

Posted by Tom at 6:10 AM | Comments (0) |

The ubiquitous Mr. Lipton

When the Walt Disney Co. board needed advice regarding Comcast's adverse takeover offer for Disney, who did the board call?

When Richard Grasso was negotiating with the New York Stock Exchange Board regarding his compensation package, who did he call?

And when the Morgan Stanley board was considering recently departed CEO Phillip Purcell and his cohort Stephen Crawford's controversial exit pay packages, who did the Morgan board call?

Martin Lipton, that's who. This NY Times article profiles the longtime New York merger and acquisitions specialist, who is famous in corporate legal circles for having refined the use of the poison pill anti-takeover strategy. The article is an interesting read on one of the legal profession's real heavyweights.

As an aside, Mr. Lipton's place in Texas legal history was cemented back in 1985 when his testimony on behalf of his client Texaco was one of the main reasons that jurors awarded $11 billion to Pennzoil during Pennzoil's famous lawsuit against Texaco over Pennzoil's failed bid for Getty Oil. After filing a historic chapter 11 case to avoid paying the resulting judgment, Texaco settled the Pennzoil judgment for $3 billion in 1987, insuring Houston plaintiff's lawyer Joe Jamail's place among Texas' richest lawyers.

Posted by Tom at 5:10 AM | Comments (0) |

July 27, 2005

Groundhog Day in the airline industry

Last week, it was Delta.

This week it's Northwest.

Bankruptcy lawyers continue to rejoice with the seemingly endless supply of reorganization candidates that the airline industry generates.

By the way, since 2001, Delta has lost a cool $10 billion, while Northwest has lost $3.6 billion.

Posted by Tom at 6:11 AM | Comments (0) |

Reviewing BP's responsibilities

As if the fatal blast at its Texas City plant earlier this year (for which it has already admitted liability) and the listing of its huge Thunder Horse drilling platform was not enough, British Petroleum executives wake up today to a front page Wall Street Journal ($) article that reports that the OSHA investigation into the blast has discovered that it was only the latest in a series of major "incidents" at the Texas City plant over the past 16 months, including a September 2004 accident in which two BP employees were scalded to death while removing a valve from a hot-water line and a big March 2004 fire that did not result in any deaths.

Behind the motto "Beyond Petroleum," BP has been one of the corporate leaders in promoting an image of social responsibility, a topic on which Professor Ribstein has written and commented extensively. For example, BP CEO John Browne has been a mainstream media darling for advocating reduction of global warming by lowering carbon-dioxide emissions at BP facilities. Now, against a backdrop of cost cuts and old equipment at its Texas City refinery, plaintiffs' attorneys in the wrongful death and personal injury lawsuits resulting from the Texas City blast are planning on portraying BP's social responsibility agenda as merely a public relations ruse to cover-up its business practice of exposing refinery workers to grave danger. BP announced a $700 million charge against earnings earlier this week to cover its projected liability related to the lawsuits.

Isn't it interesting how even seemingly innocuous corporate policies have a way of backfiring when they stray too far afield from the basic corporate purpose of maximizing shareholder value?

Posted by Tom at 4:52 AM | Comments (0) |

July 26, 2005

Apple stories

The ever informative Dwight Silverman informs us that the new Apple Store is opening this weekend in The Woodlands. Given the spirit of the typical Mac user, Dwight points out that you may want to allow the initial stampede to recede before venturing over to do some serious shopping.

By the way, speaking of Apple, you can rest assured that Ken Leebow will not be one of the shoppers at an Apple Store anytime soon!

Posted by Tom at 3:47 PM | Comments (0) |

Bidg and Berkman

In the Stros romp over the Phillies last night, Craig Biggio and Lance Berkman hit back-to-back home runs twice, once in the first inning and then again in the third. By the way, in case you hadn't noticed, the Stros are 52-47, in 2nd place in the NL Central 10 1/2 games back of St. Louis, only 3 games behind in the Wild Card race, and have won 8 out of their last 10 games.

Bidg and Berkman are -- along with injured teammate, Jeff Bagwell -- among a small group of Stros players who are legitimate candidates for Baseball's Hall of Fame. The rare feat of homering back-to-back twice in one game gives me an opportunity to pass along the following career and recent season statistics for both Bidg and Berkman:

Berkman
YEAR	AGE	RCAA	OBA	SLG	OPS	AVG	HR	RBI	SB	G
2003	27	40	.412	.515	.927	.288	25	93	5	153
2004	28	69	.450	.566	1.016	.316	30	106	9	160
2005	29	22	.418	.528	.945	.313	11	43	1	70
CAR		276	.416	.560	.977	.304	167	578	41	845
LG AVG		0	.342	.435	.776	.269	92	372	48
POS AVG		67	.358	.472	.830	.276	117	421	56

Biggio
YEAR	AGE	RCAA	OBA	SLG	OPS	AVG	HR	RBI	SB	G
2003	37	1	.350	.412	.763	.264	15	62	8	153
2004	38	8	.337	.469	.806	.281	24	63	7	156
2005	39	12	.344	.487	.832	.280	15	44	10	96
CAR		358	.372	.437	.808	.286	249	1038	406	2505
LG AVG		0	.338	.419	.756	.268	271	1199	203
POS AVG		-101	.333	.392	.726	.265	196	1011	227

League average and position average figures are included in the tables above to give you an idea of how far above Bidg and Berkman's performance has been over average National League players and position players during their respective careers.

Throughout his almost 18 MLB seasons, Bidg has created 20 more runs per season than an average National League player and 26 more runs per season than the average National League position player (mostly second basemen). Throughout his six year career, Berkman has generated an impressive 46 more runs per season than an average National League hitter and an equally impressive 35 more runs per season than the average National League position player (mostly leftfielders).

There are many Hall of Famers who have no where near as impressive statistics as either Bidg or Berkman. Bidg should be a shoo-in for the Hall and, if Berkman keeps up his production for another 7-8 seasons or so, he would be one, too.

Posted by Tom at 2:30 PM | Comments (1) |

Not looking good for Merck

In the ongoing wrongful death civil trial against Merck involving its pain reliever drug Vioxx, the mainstream media tends to focus on seemingly important expert testimony such as that described in this article.

Being more a student of the courtroom, however, I tend to focus in such trials on jury dynamics, such as those described in this Fortune Magazine article:

Speaking in state court in Angleton, Texas, without notes and in gloriously plain English, and accompanying nearly every point with imaginative, easily understood (if often hokey) slides and overhead projections, (plaintiff's lawyer Mark) Lanier, a part-time Baptist preacher, took on Merck and its former CEO Ray Gilmartin with merciless, spellbinding savagery . . .

But in contrast to Lanier . . . (Merck defense lawyer David Kiernan) seemed to read much of his presentation and illustrated it only with stodgy, corporate headshots of Merck officials or hard-to-read excerpts from documents whose meaning was shrouded in medical jargon . . .

The trial offers jurors a stark choice between accepting Lanier's invitation to believe simple, alluring and emotionally cathartic stories versus Merck's appeals to colorless, heavy-going, soporific Reason.

H'mm. On one hand, an interesting story told through a lively presentation given without notes using colorful images. On the other hand, a bland recitation of prepared remarks given with boring images of hard-to-read text in documents.

Translated: This is not looking good for Merck.

Posted by Tom at 8:19 AM | Comments (2) |

The essential problem with third party payor health care finance

This outstanding Washington Post article (first in a series of three) on Medicare nails the key problem with reliance on third party payor health care finance systems:

In Medicare's upside-down reimbursement system, hospitals and doctors who order unnecessary tests, provide poor care or even injure patients often receive higher payments than those who provide efficient, high-quality medicine. . .

Researchers at Dartmouth Medical School, who have been studying Medicare's performance for three decades, estimate that as much as $1 of every $3 is wasted on unnecessary or inappropriate care. Other analysts put the figure as high as 40 percent.

Medicare has difficulty controlling waste because of deficiencies in the way it monitors and enforces quality standards. Its oversight system is fragmented, underfunded and marred by conflicts of interest, records and interviews show . . .

Read the entire article, including the sidebar containing related articles and graphs and the subsequent articles here and here. It's a first rate series.

Posted by Tom at 6:21 AM | Comments (0) |

City Hall, San Diego style

A couple of former City of Houston aides have had a rough spot lately, but frankly our corruption is blase' compared to what's going on at City Hall in San Diego recently.

First, the San Diego mayor resigned a couple of weeks ago amidst a pension fund scandal. Then, after about 60 hours on the job, the mayor's interim successor -- along with another member of the San Diego City Council -- was convicted of conspiracy, extortion, and fraud in connection with a scheme to receive money for changing a city law to benefit strip club owners. With a new interim mayor and another mayor to be elected in a special election, that makes four mayors by my count in the space of just a few months. All of which prompted economist and San Diego resident James Hamilton to observe:

Forgive me if this sounds paranoid, but isn't this the same crowd to whom the Supreme Court gave the power to kick me out of my home in order to hand it to some developer? Not that any City Council members would ever let how much money they got from that developer influence their decision on something like that.

Posted by Tom at 5:31 AM | Comments (0) |

Judge Roberts in action

Orin Kerr over at the Volokh Conspiracy refers us to this recent D.C. Circuit decision in which U.S. Supreme Court nominee John G. Roberts, Jr. wrote a lively dissent and, in so doing, provides a glimpse of why he was one of my favorites for nomination to the Supreme Court.

The decision involves a search and seizure case. The defendant was driving a car with the license plate light out. After police stopped him, it turned out that he did not have a driver's license on him, that his license had been suspended, and that the car had stolen tags. During the stop, the police could find not find anything that indicated that the car was properly registered. Thus, the police arrested the defendant and then they searched the car's trunk, where they found a gun. Wallah! The defendant was charged with a gun possession crime and we now have a search and seizure case.

When the officers searched the trunk, was there a reasonable probability that there would be additional evidence in the trunk? That's the search and seizure question being addressed in this particular decision. The majority opinion concludes that it's unlikely that there would be additional evidence in the trunk of the crimes that the police knew about at the time of the search. Judge Roberts dissents, reasoning that the arresting officers had a reasonable basis upon which to conclude that the car was stolen and thus, the search was justified because evidence of the true owner could well have been in the trunk.

However, as Mr. Kerr notes, the most interesting aspect of the decision is Judge Roberts' style. Non-combative but direct, he makes his essential point with a nice touch of understatement and pragmatism, while noting that the case was a close call:

Sometimes a car being driven by an unlicensed driver, with no registration and stolen tags, really does belong to the driver?s friend, and sometimes dogs do eat homework, but in neither case is it reasonable to insist on checking out the story before taking other appropriate action . . .

I wholeheartedly subscribe to the sentiments expressed in the concurring opinion about the Fourth Amendment?s place among our most prized freedoms. See Conc. Op. at 1, 5. But sentiments do not decide cases; facts and the law do. There is no dispute here on the law: if the officers had probable cause, they did not need a warrant; if they did not have probable cause, no warrant would issue in any event. As for the facts, the officers encountered at 1:00 a.m. an unlicensed driver operating an unregistered car with a broken tag light and stolen tags. The experienced district court judge concluded ? and I agree ? that "the circumstances were suspicious enough to amount to probable cause to search the trunk." Memorandum Order, at 5. Right or wrong, nothing about that determination reflected insensitivity to constitutional values, any more than a contrary determination would have reflected insensitivity to the needs of law enforcement.

I respectfully dissent.

This is the work of a first rate appellate judge. Check it out.

Posted by Tom at 4:53 AM | Comments (0) |

July 25, 2005

The changing Houston golf scene

This Sunday Chronicle article reviews the status of Houston's municipal golf course system, which has run a deficit for the past five years, including a cool $620,000 for the most recent fiscal year. Although rounds are down at all muni courses other than the City's crown jewel at Memorial Park, Brock Park was responsible for over 75% of the losses in the most recent fiscal year.

Frankly, the City of Houston needs to phase out of the golf business entirely. Although providing golf courses for citizens made sense a generation ago, the proliferation of a wide-variety of private daily fee courses in the Houston area have made most of the muni courses not only unattractive by comparison, but also unnecessary. Such a marketplace of private golf courses did not exist when the City of Houston developed its municipal golf system, but given the development of that private marketplace over the past 30 years, there is simply no longer any reason for the City of Houston to subsidize golf operations for a relatively small number of its citizens.

Here is a "thinking outside the box" suggestion for the Houston City Council on the golf course operation. Other than Memorial Park and Hermann Park golf courses, sell the remainder of the golf courses, including a sale or donation of the Gus Wortham Course to the University of Houston, which could then invest the funds necessary to renovate that tract into a potentially fine university course close to the University's Central Campus. With a portion of the funds generated from the sale of the courses, the City could then fund an endowment to be administered by the Houston Golf Association to promote golf to underprivileged children and citizens of Houston.

The foregoing would be a "win-win" situation for the City of Houston and its citizens. Not only would the City shed the cost of its unprofitable golf operation and provide the city's main public University with a convenient home for its storied golf program, the City would maintain two very good, profitable and well-located municipal golf courses, and provide its citizens who need it the recreational opportunity to enjoy the game of golf.

Posted by Tom at 8:24 AM | Comments (5) |

Chronicle follows up on Harris County Jail story

The Chronicle's Steve McVicker and Bill Murphy follow up their earlier story on the chronically abysmal condition of the Harris County Jail facilities with this story that reports that Harris County officials have ignored repeated warnings regarding the unsanitary and over-crowded condition of the jails.

To make matters even more egregious (if that were possible), a Sam Houston State University report warned Harris County officials almost two years ago of a looming explosion in the county jail population. Despite that report, the Harris County Criminal Justice Committee -- which was created in 1995 in response to a jail-overcrowding lawsuit that resulted in the jail being under a federal judge's oversight for 23 years -- has not met to review the report or the conditions at the jail.

By strange coincidence, the Criminal Justice Committee is now scheduled to meet this Friday. I'm sure the previous Chronicle article has nothing to do with that.

According to the article, the Chronicle's previous article on the jail conditions prompted several calls from jail employees who described in detail how county officials have intentionally misled state officials regarding just how bad the conditions are at the jails:

Speaking on the condition of anonymity, the two jailers charged that Sheriff's Office officials sometimes hid inmates from state inspectors.

"They played a game of musical inmates," said one jailer, who also is a deputy sheriff. "They would take them from one building to another through the tunnel system."

After the inspectors left, the deputy said, the inmates were crammed back into units that already were fully occupied ? a practice he called "sardining."

And, they say, inmates already are suffering from staphylococcus infections.

Chief Deputy Mike Smith, who oversees jail operations, denied that any inmates have been concealed from inspectors and said no inmates are going without mattresses.

He also said he is unaware of any widespread staph outbreak.

"You know, we have to work here, too," he said.

This is really a sad reflection of our community that the chronically poor condition of the Harris County Jail facilities continues to be ignored (or covered up) by Harris County's elected officials. Here's hoping that the Chronicle stays on top of this issue.

Posted by Tom at 6:13 AM | Comments (1) |

Stros 2005 Review: Checking in on the Stros

When journeyman Eric Bruntlett (-5 RCAA/.262 OBP/.333 SLG./.595 OPS) jacks a three run yak in the 14th inning to pull out a Sunday afternoon win and finish off a 7-4 roadie, you know it's time to check in on the Stros (51-47).

Somehow, the Stros find themselves only three and a half games behind the Nationals (55-44) for the lead for the NL Wild Card Playoff spot, but my sense is that the Nationals are sinking and will not be in contention any longer by Labor Day. Accordingly, it's looking as if the Stros' competition for the Wild Card spot is going to be the NL East teams other than the Nationals -- the Braves (55-44), Phillies (52-47), Mets (51-47) and Marlins (49-47) -- and the Cubs (49-48) in the NL Central.

Inasmuch as combining each club's runs created against average ("RCAA", explained here) and its runs saved against average ("RSAA", explained here) is a good measure of each club's strength relative to the rest of the league, here is how the above-named clubs involved in the Wild Card race stacks up:

Braves -29 RCAA/85 RSAA = 56
Marlins 72/-16 = 56
Cubs 51/-1 = 50
Stros -26/54 = 26
Mets 4/17 = 21
Phillies -40/63 = 13
Nationals -3/13 = 10

Consequently, given that the Braves will probably win the NL East, the Marlins and the Cubs are the Stros main competition at this point for the Wild Card, although the Mets are showing signs of life recently. The Marlins and Cubs are both considerably stronger hitting clubs than the Stros overall, but the Stros pitching is much better than either of those clubs and the Stros hitting is trending upward with Berkman (19/.422/.508/.930) continuing to regain form, Ensberg (29/.388/.595/.983) making a strong case for Comeback Player of the Year, and Jason Lane showing signs of life (-4/.294/.472/764). If the Stros hitters can climb back to at least an average National League club (i.e., an RCAA of zero), then the Stros pitchers are strong enough to carry the club to an RCAA/RSAA in the 75-85 range, barring injury to any of the key pitchers. The Stros won the Wild Card last season with a 96 RCAA/RSAA and attaining even a 75-85 season total may be a tall order for this club absent acquisition of another strong hitter, but the Stros at least appear to have a chance (barring injury to any key players) to remain in contention for the Wild Card spot with the current lineup. For at least the time being, my pre-season prediction for this Stros club is looking fairly accurate:

Thus, even with the loss of Beltran and Kent, the Stros still appear to me to be an above .500 team. The offense is probably going to slide a bit with Berkman out for the first month of the season. But the starting pitching looks very good, Lidge is currently the best closer in the National League, and the middle relievers look improved over last season's dubious group. If Lane hits as expected, Ensberg rebounds, Bags (+17 RCAA) and Bidg (+8 RCAA) maintain as well as they performed last season, and the young players develop well, then my sense is that the Stros are an 85 to 88 win team with an outside chance to take it over 90 wins if the injury bug does not bite.

Here are the Stros hitters' individual RCAA through Saturday's games, courtesy of Lee Sinins:

Morgan Ensberg 29
Lance Berkman 19
Craig Biggio 9
Orlando Palmeiro 7
Jeff Bagwell 1
Jason Lane -4
Humberto Quintero -4
Luke Scott -4
Todd Self -4
Eric Bruntlett -5
Willy Taveras -6
Jose Vizcaino -6
Raul Chavez -10
Chris Burke -11
Mike Lamb -11
Adam Everett -12
Brad Ausmus -14

The Stros team RCAA of -26 is 11th among the 16 National League clubs. Add Adam Dunn (26/.394/.581/.975) to that group, and things could get very interesting for the Stros.

Here are the Stros pitchers' individual RCAA through Saturday's games

Roger Clemens 43
Roy Oswalt 31
Andy Pettitte 20
Dan Wheeler 12
Brad Lidge 7
Chad Qualls 3
Mike Burns 1
Mike Gallo 1
Russ Springer -4
John Franco -5
Chad Harville -5
Brandon Backe -9
Brandon Duckworth -12
Ezequiel Astacio -14
Wandy Rodriguez -15

The Stros team RSAA of 54 is 4th among the 16 National League teams. Clemens, Oswalt, and Pettitte currently are the strongest three starting pitchers on one team in MLB.

The Stros begin a seven game game homestand against Wild Card playoff competitors the Phillies and the Mets this week before making a West Coast swing next week against the Diamondbacks (48-52) and the Giants (42-55).

Posted by Tom at 4:00 AM | Comments (0) |

July 24, 2005

The Chron interviews outgoing Enron Task Force Director

The Chronicle's Mary Flood, who has done a fine job of covering the Enron case for the local newspaper, interviews Andrew Weissmann, the former Enron Task Force director who resigned as director of the Task Force this past week amidst widespread allegations of prosecutorial misconduct.

Overall, the interview is a disappointing fluff piece. Ms. Flood -- who, as the Chronicle's lead reporter on Enron, is not the best person to be ruffling feathers with the Task Force -- asks Mr. Weissman only a general question about prosecutorial misconduct and fails to follow that up with questions about specific instances of misconduct, such as the following:

The Task Force's questionable public relations campaign demonizing anything having to do with Enron;

The Task Force's poor trial record involving former Enron executives (one conviction of a mid-level manager out of seven Enron executives tried to date) compared with the Task Force's bludgeoning former Enron executives into plea bargains;

The Task Force's dubious policy of fingering potential defense witnesses as either unindicted co-conspirators or targets of the Enron criminal investigation to deter such witnesses from testifying for defendants in the Enron criminal trials;

The Task Force's disingenuous market loss arguments in connection with the sentencings of the five convicted Nigerian Barge defendants, which argument contradicted the Justice Department's position before the U.S. Supreme Court;

The dubious nature of the Task Force's prosecution of the Merrill Lynch executives in the Nigerian Barge case, particularly Daniel Bayly (note posts here and here) and William Fuhs.

The overreaching nature of the Task Force's prosecution of Arthur Andersen which the Supreme Court noted in its unanimous reversal of that conviction;

The Task Force's elicitation of false testimony from Ken Rice, its key witness in the Task Force's miserably failed Enron Broadband prosecution;

The Task Force threats toward two witnesses in the Broadband trial -- Beth Stier and Lawrence Ciscon -- who testified favorably for the defense in that trial;

A Task Force prosecutor's violation of the judge's instruction not to question witnesses on certain subjects during the Broadband trial; and

The strong evidence that the Task Force has been chilling witnesses favorable for the defense in the upcoming trial of former Enron key executives, Ken Lay, Jeff Skilling, and Richard Causey.

Given the extent of the foregoing instances of misconduct, if I would have been allowed one question of Mr. Weissman, it would have been the following:

"Do you believe that the end of convicting former Enron executives of crimes justifies the means by which you obtain such convictions?"

My sense is that most Chronicle readers would have been far more interested in Mr. Weissmann's answer to that question than his answer to the question of how has he enjoyed his time in Houston.

Posted by Tom at 6:45 AM | Comments (1) |

July 23, 2005

Watch out!

The Chronicle's Rad Sallee reports on one category in which Houston's Metropolitan Transit Authority is surely leading among the country's transit systems:

MetroRail logged its third collision in four days Friday, making 29 this year and 96 since fall 2003, when testing of the rail line began.

Before that, the last collision was July 5. The last string of three accidents in four days was March 13-16. Metro recorded three light rail collisions in two days Jan. 26-27 and five in eight days March 22-29, 2004.

Who boy, Kevin Whited and Anne Linehan at blogHouston.net are going to have fun with this one. BlogHouston.net's Houston Transit category and Kevin's PubliusTX.net Danger Train category are the two best sources for information on the seemingly unending foibles of Houston Metro.

By the way, is it just me or does Mr. Sallee's analysis of MetroRail's many crashes seems eerily similar to the way in which one would evaluate a Major League Baseball player's career statistics?

Posted by Tom at 8:03 AM | Comments (1) |

Spitzer fights payola with a little payola

My two teenage daughters and their friends just laugh at me whenever I observe to them that most of the noise that they listen to on the radio is so bad that the only way the "music" could ever make the airwaves is through bribery.

Well, my view was vindicated today as this NY Times article reports that New York Aspiring Governor Eliot Spitzer will announce a settlement that will involve at least a $10 million fine with Sony BMG Music Entertainment as part of an 11-month investigation into how music companies get radio stations to play songs. As is typical in such investigations these days, the big four global music companies -- Sony BMG, Vivendi Universal SA's Universal Music Group, EMI Group PLC, and Warner Music Group Corp. -- have apparently been cooperating with Mr. Spitzer's investigation out of fear of a criminal indictment that would be potentially devastating to the companies' U.S. business.

The investigation apparently relates to the companies' use of so-called "independent promoters," who are brokers who are paid to plug new songs to radio stations. The practice is similar to payola -- direct payment in exchange for airplay of specific songs -- which has been illegal under federal law since the payola scandals of the 1950s. Inasmuch as the line is often a tad fuzzy between merely persuading a radio station executive to play noise and offering the executive a quid pro quo for doing so, representatives of Mr. Spitzer and Sony BMG have apparently been haggling over mutually acceptable guidelines for future conduct between the music company and radio stations.

Although I am usually wary of government attempts to criminalize these types of business transactions, I could make an exception in this case if the settlement contains a prohibition against playing the noise of this "artist." Despite such social benefits, Larry Ribstein notes that there are strong economic arguments in favor of payola and that the governmental prohibition against it only made the market less transparent.

Posted by Tom at 7:14 AM | Comments (0) |

July 22, 2005

The sad case of Daniel Bayly

Daniel Bayly has had an impeccable professional career. A 30 year veteran of the executive ranks of Merrill Lynch, Mr. Bayly joined Merrill in 1972 as an associate in New York and rose through the ranks to become a managing director of Merrill while working in Chicago. After returning to New York, Mr. Bayly was named head of Merrill's U.S. corporate banking group in 1993, and eventually was named head of Merrill's global investment banking division. During his three decades with Merrill, Mr. Bayly was one of the firm's most popular and respected executives.

Despite this stellar career, Mr. Bayly has just finished serving the first week of a two and a half prison sentence handed down this past May in connection with the Enron-related Nigerian Barge case. Although Mr. Bayly has a strong case for having his conviction overturned, the Fifth Circuit Court of Appeals denied without so much as an explanation of its basis for doing so his motion to remain free pending disposition of his appeal.

As with the sad case of Jamie Olis, most of the mainstream media is ignoring Mr. Bayly's plight, treating it as a bad dream that has now gone away. However, Mr. Bayly's family and many friends are not going to allow this injustice to recede quietly from public view. In that regard, two friends of the Bayly family -- Susan Scherbel and Steven Jackson -- prepared the following piece that makes as compelling a case as any legal brief that Mr. Bayly is a victim of the government's misguided criminalization of ordinary business transactions in the post-Enron era and that, but for God's grace, this nightmare could be happening to any of us:

Last week, Daniel Bayly left his home and family in Connecticut to report to a prison in Hopewell, Virginia. There, he will begin a two and a half year prison sentence for his role in the Nigerian Barge transaction - a legitimate and successful deal between Enron and Mr. Bayly's former employer, Merrill Lynch. From the evidence presented at his trial, his only offense appears to be that he was at Merrill Lynch when the deal was done. This is a tragic time for the Bayly family as well as for us, the hundreds of friends, colleagues and well-wishers who know Mr. Bayly to be a good, decent and honorable man.

At Mr. Bayly's sentencing in April, Judge Ewing Werlein, Jr. said: " . . . it may be that I've never had a defendant stand before me, probably in my years as a judge and having sentenced hundreds of people, that has had a more glowing and extraordinary record of being a good citizen . . ." However, when Mr. Bayly appealed his conviction, his motion to be released pending appeal was denied. It was irrelevant that he had no history of prior wrongdoing. It was similarly irrelevant that over one hundred of his close friends and supporters sent letters to the court pledging bonds of $10,000, guaranteeing Mr. Bayly's bail. Neither the strength of his appeal, his stellar record nor the trust of his friends has prevented the worst: Mr. Bayly is in jail while his appeal proceeds - this is the way a hardened, serial offender is treated. And, yet, nothing about the case or this man merits this indignity.

At the time Merrill Lynch purchased an interest in unfinished energy-producing barges from Enron, Mr. Bayly was the head of global investment banking at Merrill Lynch. But, contrary to what has been described in press accounts, Mr. Bayly did not structure, champion, approve or benefit from the transaction. The job of analyzing the transaction was delegated to the Merrill Lynch Commitment Committee composed of eight lawyers, CPA's and financial experts from outside of Mr. Bayly's division, who unanimously blessed the deal and recommended approval. Mr. Bayly's boss, one of the top five officials at Merrill Lynch, was responsible for approving the transaction.

Mr. Bayly's sole involvement in the Nigerian Barge transaction consisted of determining that the investment banking division could afford the $7 million investment in the deal (this was not difficult - his division had revenues of $4 billion that year). Then, at the request of the Committee, Mr. Bayly's boss directed him to participate in a conference call with Enron's Chief Financial Officer, Andrew Fastow. During Merrill's review process, Enron had repeatedly promised that the barges would be completed and ready for resale within six months, but the Committee wanted Mr. Fastow's personal assurance on this point.

Despite these benign facts, a Houston jury convicted Mr. Bayly of criminal conspiracy. Anyone with more than passing familiarity with the case was not surprised -- Houston was devastated by the Enron bankruptcy and, unfortunately, the Nigerian Barge trial was the first Enron-related criminal trial to be held there. By this time, many of the key people involved in Enron's fall had already entered plea bargains -- they would never see a courtroom or experience a trial. With none of the "major players" in sight, Mr. Bayly and a few other innocent bystanders were poised to bear the public's wrath.

To make matters worse, Justice Department prosecutors made it practically impossible for Mr. Bayly's lawyers to mount an effective defense. Although there were over fifty other Merrill Lynch and former Enron employees with knowledge about the Nigerian Barge deal (including numerous lawyers and other experts), all of those witnesses declined to testify during the trial because the prosecutors had named them as "unindicted co-conspirators." Inasmuch as the only difference between an indicted and non-indicted co-conspirator is government favor, the prosecutors used this tactic to scare these Merrill Lynch and Enron employees from coming forward and providing valuable, corroborative testimony for Mr. Bayly about the way banking deals operate, the limited role played by Mr. Bayly and the other defendants, and the deal itself. As a result, the true story of Mr. Bayly's involvement in the transaction was never told during the trial. Testimony about the transaction came from prosecution witnesses with second-hand information who had cut deals with the government.

In the end, perhaps the most troubling aspect of this case is that it is about a successful deal common in investment banking circles. Not suited to conventional financing, the barge deal was precisely the kind of transaction companies regularly bring to their investment banks. Merrill's decision to purchase the barges was completely legitimate. Similarly, Merrill's subsequent sale of the completed barges six months to a partnership (set up by Enron for an entirely different set of investors) was appropriate. This sale, too, was thoroughly reviewed by numerous attorneys (including those who had blessed the original sale) prior to being approved (again, not by Mr. Bayly). It is noteworthy that the barges were then combined with other barges held by Enron and sold to a third party buyer, global power company AES Corp., that actually paid more than Merrill had received (proving that the barges were valuable).

In short, Mr. Bayly is in prison because of a highly profitable transaction that occasioned no loss to Enron or to its shareholders. Enron made money, its shareholders made money, the people of Nigeria obtained low price energy and, according to its financial reports, AES is making money (the barges are currently producing roughly $50mm/year). In fact, the sole issue of the case turns on when Enron and its auditors reported the gain (the Justice Department contends that the gain should have been reported at the time of the sale to AES rather than six months earlier at the time of the Merrill purchase). Not even the prosecutors alleged that Mr. Bayly and his co-defendants controlled or even knew of Enron's accounting choice. What kind of justice is this?

Those of us who know Mr. Bayly have tried to help him. However, we are reluctant. We are warned that a single voice raised in his defense could provoke the Department of Justice lawyers to mete out more cruelty. When will their bloodlust be satiated? Isn't it enough that this wonderful man who had a 30-year flawless record at Merrill Lynch was forced out of his job and had his reputation sullied? Isn't it enough that he endured a Kafkaesque trial, when all who could help him were silenced by fear and intimidation? Isn't it enough that he was subject to electronic monitoring and his assets frozen? Isn't it enough that he and the others were plucked from their homes, families and children sent to prison despite their appeals (something virtually unthinkable for first time offenders in American jurisprudence)?

These men did nothing more than assist a respected client. They followed every conceivable rule and procedure. Furthermore, they pose no threat to anyone -- why could not they be free pending their appeals? As we onlookers cower, afraid to help these people, lest our efforts unleash new waves of wanton harassment against them, it's damned hard to refer to their tormentors as "Justice."

Posted by Tom at 4:05 AM | Comments (11) |

Dan Jenkins on America's contributions to golf

In summertime, thoughts turn to golf, and the August issue of Golf Digest is called it's All-American edition. That theme gives columnist Dan Jenkins an opportunity to provide his wit and wisdom on America's contributions to golf in this hilarious article entitled What America gave Golf -- We might have burned the edges, but the good outweighs the bad (previous posts on Mr. Jenkins' work are here, here, here, and here). The entire article is a must read, but here are a few Jenkins pearls to peak your interest:

It's easy enough to blame America for the six-hour round, . . . but ask yourself this: What would the game be like without the gimme, the mulligan, the shapely cart girl and a chili dog at the turn?

Look at it this way: If America hadn't gotten interested in the game we might still be swinging at it in tweed coats and plus fours, and trying to talk like Alistair Cooke. . . But what about today? Do we really need a golf ball that can puncture a hole in the side of a 68.7-ton Abrams tank when an anemic 14-year old girl swings at it and doesn't even take the 7-wood back to horizontal? This is the same golf ball you can launch in London with a high slice, have it self-correct somewhere over Paris, and eventually land safely in the fairway in Milan.

Mr. Jenkins goes on to discuss the purely American phenomenom known as "the Amana hat," the invention of metal woods, Jimmy Demarat's flashy clothes, $400 green fees, and the 900 yard par five, to which he observes:

Which begs the question of whether we really need a 900-yard par 5. I mean, does anyone need a 900-yard par 5 other than the real-estate developer who'll surround it with townhouses on streets named for famous courses he's never seen and therefore misspells? Welcome to Interlacking Drive . . . Baltusrover Avenue . . . Winged Valley Court . . . Oakland Pines Boulevard. America didn't originate the gated community -- I think you have to give that to Buckingham Palace -- but we popularized it and contributed the windshield decal.

Read the entire article. No doubt about it, Dan Jenkins is one of America's great contributions to golf.

Posted by Tom at 4:00 AM | Comments (1) |

July 21, 2005

How to avoid an Enronesque experience

This earlier post that compares American International Group, Inc.'s business model to that of Enron Corp. makes an important point about the true reason that Enron collapsed.

The general public's perception -- fueled by the Enron Task Force and most of the mainstream media -- is that Enron collapsed under the weight of a massive fraud. However, as the Enron Task Force's abysmal record in court against former Enron executives reflects, the vast majority of Enron's business operations were entirely legitimate outside of former Enron CFO Andrew Fastow's relatively few questionable transactions that he arranged to enrich himself and a few of his close associates. But how did the public disclosure of Mr. Fastow's relatively small financial schemes cause a company with a $60 billion market capitalization to break apart?

The reason is that Enron's business-model -- as does AIG's and most other financial service and insurance companies -- requires its customers to rely on the company's financial integrity and not the company's net worth. Accordingly, when customer confidence in a company such as Enron is undermined, participants in those companies' markets become less willing to engage in the purchase or sale of long-term contracts that might not be fulfilled. For example, as the "bid-ask" spreads on Enron's trading contracts diverged in late 2001 amidst disclosure of Mr. Fastow's shenanigans, Enron's markets unraveled and Enron's formerly profitable trading business collapsed.

Thus, bad accounting alone did not bring down Enron. However, public disclosure of the questionable accounting for a relative few of Mr. Fastow's questionable transactions did undermine the business customers' trust in Enron's financial integrity, and the disappearance of that trust in the marketplace caused Enron's business model to collapse. Regardless of the financial soundness of any such "trust-based" company, when its customers stop believing in the financial integrity of the company, the company will fail.

All of which is a long way of bringing us to this interesting Floyd Norris NY Times column in which he examines what has occurred over the past year with another such "trust-based" company, Allied Capital Corporation:

The government had opened a criminal investigation and the company's stock plunged. What was the company to do?

At Allied Capital, the answer was clear - and effective. First, it blamed short sellers for prompting the investigation. Then it added a politician to its board and declared that henceforth it would provide less information than ever to its investors.

And it worked. More than six months later, Allied Capital's stock is back above where it was when the company disclosed the Justice Department investigation into Business Loan Express, a subsidiary that makes government-backed small business loans.

That unit has supplied Allied with profits it used to pay dividends to investors, but disclosures Allied has made seem to indicate that it was a cash drain on Allied. Even that is no longer clear. In its latest quarterly report, Allied slashed the information it disclosed on Business Loan Express.

Meanwhile, in addition to ratcheting down on the amount of information disclosed to the public regarding its subsidiary, Allied Capital hired a former S.E.C. attorney as a lobbyist, a former Clinton Administration aide to represent it in connection with the Justice Department and S.E.C. investigations, and appointed the former head of the Bush re-election campaign organization to its board. The results of Allied's approach are impressive:

Since Allied took its present form in 1997, shareholders who reinvested dividends have made 13 percent a year, triple the return of the Standard & Poor's 500. It pays hefty dividends and regularly raises cash by selling new shares. Most shares are owned by individual investors.

And what has happened to the short seller?:

[The short seller] has maintained a short position in Allied stock and still questions the company's accounting. It seems likely that he played a role in sparking the government investigations. He has lost money on the short position.

Under similar circumstances back in 2001, when another notorious short seller asked several pointed questions about Enron's accounting to then Enron CEO Jeff Skilling during a conference call, Mr. Skilling snapped that the short seller was an "asshole" for trying to move the market on the price of Enron's stock in favor of his position. A few weeks later, Mr. Skilling resigned, Enron proceeded to undergo a massive review of its accounting that resulted in a restatement of earnings and its balance sheet, Enron CFO Andrew Fastow was fired, and Enron subsequently became much more transparent in its financial disclosures.

You already know the result -- Enron is toast and now synonomous with business fraud in American society. In the meantime, Allied Capital -- while refusing to make detailed disclosure of its finances -- continues to generate impressive earnings for its shareholders.

There is a lesson there, but I'm still trying to figure it out. ;^)

Posted by Tom at 6:00 AM | Comments (0) |

Epstein on judicial activism

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago, and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution. In this Wall Street Journal ($) op-ed on the nomination of John G. Roberts to the U.S. Supreme Court, Professor Epstein makes a good point regarding the simplistic and often misleading criticism of "judicial activism":

From the get-go, I would insist that we view with suspicion the oft-hurled epithet of "judicial activism." Judicial review, which allows the Court to strike down federal and state legislation, is an indisputable part of the Constitution. The structural and substantive prohibitions the Constitution contains are large. One can be a "strict constructionist" and still believe that major legislative initiatives, executive orders, and administrative rules are unconstitutional. By the same token, the government should be accorded a wider degree of discretion in running its own affairs -- the military, courts, schools, etc. -- a view that is largely permissive of government affirmative action programs that parallel those which comparable private institutions adopt on a voluntary basis. In these cases, the private benchmark offers a useful measuring rod for state discretion.

In that regard, Professor Epstein goes on to make an interesting point about the recent public criticism of the Supreme Court's controversial decision Kelo v. The City of New London as being another example of judicial activism:

Next, Kelo v. The City of New London recently addressed the deceptively difficult question of what counts as a taking of property "for public use." Justice Stevens held that any "conceivable public purpose" sufficed, and thus allowed the City to buy out ordinary homeowners in order to warehouse their property for future but undefined "park support" purposes.

Kelo has prompted an incredible popular backlash, as legislatures across the country have wondered how an "activist" Court could have such a tin ear for the Constitution. How ironic! Justice Stevens's lamentable opinion was the polar opposite of judicial activism. Indeed, it represented a deadly form of judicial deference to legislative action that makes a mockery of both the text and purposes of the "Public Use" Clause. . .

Read the entire piece.

Thus, in matters of judicial interpretation, be wary of labels. As we have seen recently with the failure of many federal judges to exercise their judicial authority to turn back the executive branch's dubious criminalization of business during the post-Enron era, criticism of judicial activism and advocacy of strict constructionism is often merely a political front for deference to the abusive exercise of state power. In that vein, the Supreme Court's recent unanimous decision in Arthur Andersen could be characterized as judicial activism. If that is so, then count me as a judicial activist.

Posted by Tom at 5:06 AM | Comments (2) |

A crushing defeat for the Enron Task Force

In yet another stunning blow in a series of setbacks to the Enron Task Force, the jury in the Enron Broadband trial returned late this afternoon and advised U.S. District Judge Vanessa Gilmore that they had acquitted three of the five defendants on certain of the 164 counts and were hopelessly hung on the remainder of the counts against all five defendants. Here is Mary Flood's Chronicle article on the outcome.

Scott Yeager, the former Enron Broadband strategic planning executive, was acquitted on the wire fraud and conspiracy charges, former Enron Broadband co-CEO Joe Hirko was acquitted on insider trading and money laundering charges, and former engineering executive Rex Shelby was also acquitted on the insider trading charges. The jury could not reach an agreement on any of the counts against former Enron Broadband finance executives Kevin Howard and Michael Krautz. Judge Gilmore declared a mistrial on all of the counts -- some of which related to each defendant -- on which the jury could not reach a decision.

On one hand, it's not surprising that the jury would be in disarray over their deliberations on the charges. To reach a decision, the jury had to leaf though 60 pages of jury instructions and answer more than 190 special issues about the guilt or innocence of five former Enron Broadband executives. Consequently, no wonder the poor jurors bailed out after three days of deliberations and three months of an often mind-numbing trial.

On the other hand, it's hard to recall a white collar trial that turned out as badly as this one did for a prosecution team that thought getting convictions in this case would be a tap-in. How did this trial veer so far out of control for the prosecution?

Well, to begin, the Task Force's decision to throw 164 charges of mud at the five defendants to see what would stick turned out to be an unmitigated disaster. The jurors could not reconcile the voluminous allegations of wrongdoing with what they heard over three months of often idiosyncratic testimony. Then, when the trial actually began, the over-confident Task Force prosecutors were placed on the defensive almost from the outset.

The first blunder of the Task Force during the trial occurred when prosecutors elicited false testimony from the government's key witness, former Enron Broadband co-CEO Ken Rice. Then, after Rice's testimony was impeached dramatically during cross-examination, the prosecution compounded its error by calling a witness (Beth Stier) who testified that, based on discussions with the Task Force prosecutors before her testimony, she felt threatened by the Task Force prosecutors. Later in the trial, another witness -- Lawrence Ciscon -- testified that he was threatened shortly before his testimony by prosecutors with a possible indictment if he proceeded to testify on behalf of the Broadband defendants. To make matters worse, toward the close of the trial, U.S. District Judge Vanessa Gilmore sharply rebuked an Enron Task Force prosecutor for asking a question on cross-examination of Broadband defendant Kevin Howard that at least violated the judge's prior instructions to the Task Force prosecutors. Finally, earlier this week, Task Force director Andrew Weissman took the unusual step of resigning as head of the Task Force while the Broadband jury was still deliberating amidst rumblings of prosecutorial misconduct within the Task Force.

Accordingly, at the end of the day, the case that the Enron Task Force thought was their strongest against former Enron executives turned into an absolute debacle. Although the Task Force's mishanding of the trial certainly had something to do with that result, there are two more important dynamics that are actually more revealing of why the prosecution's case went awry.

First, the Enron Task Force is facing what is often called among lawyers involved in high profile cases the "curse of the correct result." The Task Force has always been better at demonizing Enron in the media and bludgeoning former Enron executives into highly-publicized plea bargains than actually proving its charges in court. The scorecard after the Enron Broadband trial is that the Enron Task Force -- in over three and a half years on the job -- has prosecuted to trial seven former Enron executives and obtained precisely one conviction of a mid-level Enron manager. Despite that rather unimpressive batting average, the Task Force's far better public relations machine has effectively pounded into the public's mind that the "correct" verdict should be a conviction in any Enron-related criminal case even before the case is tried. That was certainly the case in the Enron Broadband trial.

However, the public's fixed opinions were not based on the testimony as it was presented in court. The general public did not see the witnesses testify, and the public had no way to assess the credibility of those witnesses. The public's fixed opinions were based largely on propaganda about Enron, much of which the Task Force willingly facilitates.

We now know the story of the trial. The Task Force's case was far less clear cut than the prosecutors suggested to the jury during opening arguments. The Task Force had to deal with the effect of its blunders described above, and the lawyers for the Broadband defendants put up a well-organized and effective defense. As is often the case, the prosecution was forced to rely on the testimony of witnesses who admitted committing crimes and benefiting from those crimes, and some had personal issues that reasonably called their credibility into question.

Thus, the jurors who actually heard the evidence in this case concluded that the Broadband defendants were not guilty or that the government had failed to carry its burden of persuading all the jurors that the crimes alleged had occurred. This result is contrary to the "correct" verdict that the general public has about anything having to do with Enron, but blame that on the "curse of the correct result," not the jurors. In my view, this jury that actually reviewed the evidence and heard the witnesses testify came back with a result that -- although not perfect -- is the correct one based on the evidence that was actually presented in court.

Finally, as has been noted many times on this blog, the result in the Enron Broadband trial stands for the dubious nature of the government's policy of criminalizing merely questionable business practices. As much as the government protests that true business crimes are deterred by vigorous prosecution of such transactions, the fact of the matter is that any reasonable interpretation of justice is strained in attempting to square the result in the Enron Broadband trial with the results in the Richard Scrushy case, the case of Arthur Andersen, the case of Martha Stewart, the sad case of Jamie Olis, the case of Dan Bayly, the case of William Fuhs, the DOJ's handling of the Global Crossing case, the Tyco case, the Bernie Ebbers case and many others.

These highly disparate results are not the product of a rational deployment of our criminal justice system, and the carnage to the families of the businesspeople who are caught in this troubling cauldron simply cannot be reasonably dismissed as a "trade-off" of an imperfect system. Meanwhile, respect for justice and the rule of law upon which the success of American society is largely based is continually eroded by the roulette nature of such prosecutions. If we lose the public's respect for justice and the rule of law, then, as Sir Thomas More asked Will Roper in A Man for All Seasons, "do you really think you could stand upright in the winds [of abusive state power] that would blow then?"

Words to ponder as the Task Force now turns to using admitted felon Andy Fastow as its key witness in the upcoming trial of Messrs. Lay, Skilling and Causey. That trial could well make the hard-fought Broadband trial look like a picnic.

Posted by Tom at 5:00 AM | Comments (5) |

July 20, 2005

The least surprising lawsuit of the year

After this, you just knew this was coming.

The Lerach Coughlin Stoia Geller Rudman & Robbins LLP lawsuit against Morgan Stanley's board of directors, former executives and lawyers alleges that directors breached their fiduciary duty and abused their control of Morgan Stanley by mismanaging the firm for several years, but particularly by handing out large severance payments to former Morgan CEO Philip Purcell and his former right hand man, Stephen Crawford. The lawsuit also asserts claims against the firm's departing general counsel and outside law firm Kirkland & Ellis for legal malpractice and professional negligence in their handling of the Ron Perelman fraud case in Florida that recently resulted in a $1.57 billion judgment against Morgan.

Interestingly, the lawsuit even took a swipe at new Morgan CEO John Mack, who the lawsuit claims approved the payoffs to Messrs. Purcell and Crawford "to secure his return to power." Mr. Mack has publicly stated that he did not know about the awards before he was hired, but that he is not going to "second-guess" Morgan board decisions that were made prior to his taking over as CEO. Mr. Mack did waive his own pay guarantee when the awards to Messrs. Purcell and Crawford became public.

Posted by Tom at 8:10 AM | Comments (0) |

New Fifth Circuit decision on family limited partnerships

Following on its decision last year on the popular estate planning tool of family limited partnerships, the Fifth Circuit recently issued this decision in the case of deceased Texas millionaire Albert Strangi and, in so doing, provided a guide for what not to do in utilizing a family LP. Here is a NY Times article on the decision.

Family LP's allow parents to transfer assets to their children at a lower tax rate than is assessed on estates and gifts. Under the typical family LP, the parents retain a few shares of ownership while their children hold most of the shares. Moreover, family LP's are often set up in an effort to shield assets from the parent's creditors, so decisions on the vehicle are closely followed by lawyers who specialize in either estate planning or creditors rights.

The Strangi case began when Mr. Strangi died in 1994. The Internal Revenue Service claimed that his children owed taxes on all $11 million in the family LP, while the family claimed that it owed taxes on only $6.6 million. The tax court at first found in favor of Mr. Strangi's estate, but then the Fifth Circuit in an earlier ruling remanded the case to the tax court directing the tax court either to make findings of fact and conclusions of law explaining why it did not allow the I.R.S. to use a section 2036a of the Internal Revenue Code or retry the case. That particular section of the tax code states that assets that a decedent owns at the time of death are taxable using estate tax rates despite a prior transfer of such assets to a partnership.

Subsequently, the tax court issued a new opinion in 2003 in which it held that against the estate this time because Mr. Strangi continued to use assets contributed to the family LP after it was formed. For example, Mr. Strangi continued to live in his house after it was contributed to the family LP, and the tax court concluded that it could be taxed as an inheritance even though it was part of the family partnership. Indeed, the tax court found that 98 percent of Mr. Strangi's assets were contributed to the family LP and that the family LP used its assets to pay Mr. Strangi's debts after his death.

At any rate, in upholding the tax court decision and consistent with its prior ruling, the Fifth Circuit essentially concludes that pigs get fat but hogs get slaughtered when it comes to family LP's. If the transparent purpose of the family LP is tax avoidance or shielding virtually all of the parents'