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January 31, 2005

The sad case of Jamie Olis gets even sadder

This Dallas Morning News article reports that the sad case of Jamie Olis, the mid-level Dynegy executive who was sentenced to a 24 year prison sentence last year for attempting to prove his innocence on accounting fraud charges, has taken what can only be described as a punitive turn for the worse:

First he received 24 years in prison for accounting irregularities that got his plea-bargaining boss a five-year sentence. Now Jamie Olis has been moved to a tougher prison, and his wife has e-mailed friends asking for prayers.

Mr. Olis, 39, a former midlevel accounting executive at Dynegy Inc., has been transferred from a minimum-security lockup at Bastrop, Texas, to a medium-security prison at Oakdale, La., according to U.S. Bureau of Prisons records.

"He is in a place where prison gangs are a necessary part of day-to-day existence and in a population that includes people who are serving multiple life sentences," Monica Olis wrote in an e-mail to friends.

She has declined to comment to the news media.

Meanwhile, oral argument on Mr. Olis' appeal of his sentence occurred today at the Fifth Circuit Court of Appeals in New Orleans. David Gerger of Houston is representing Mr. Olis in the appeal. Here is the Chronicle story on the oral argument.

According to the Chronicle story, a substantial part of the oral argument was taken up with questions from the panel to the prosecution regarding the evidence of the financial loss that the accounting scam allegedly caused. That is a key issue because U.S. District Judge Sim Lake relied on an absurdly high financial loss figure in calculating Mr. Olis' sentence. As noted in this earlier post, even the government expert on financial loss upon whom Judge Lake primarily relied acknowledged that he did not testify that Project Alpha caused the amount of monetary loss that Judge Lake used in sentencing Mr. Olis

Although Mr. Olis is the poster boy of how the federal sentencing guidelines had run amok and needed to be overturned, the darker story is that the case is an egregious example of failed prosecutorial discretion. The conduct of the Justice Department in this case is shameful and the failure of the current Justice Department leaders to do anything about this miscarriage of justice reflects poorly on the Bush Administration. Here's hoping that the Fifth Circuit uses this opportunity to right a clear wrong.

Posted by Tom at 6:33 PM | Comments (5) |

Pam Prestridge, RIP

Pamela Adair Prestridge, a well-known Houston attorney and mediator, died suddenly this past Saturday in Houston.

Pam grew up and was educated in Louisiana, but she came to Houston early in her legal career during the early 1980's where she originally practiced at the old line downtown firm, Hirsch & Westheimer. Over the past decade or so, Pam had been in private practice as a mediator and recently served as a coordinator of Continuing Legal Education for the University of Houston School of Law. Pam was a regular in the Houston Bar Association's hilarious spoof of the legal profession, "Night Court," which is annual production and one of the Houston Bar Association's primary fund raisers.

Pam was a bright light in the Houston legal community and will be sorely missed. Funeral services will be held at 2:00 p.m. Tuesday, February 1, 2005 at Earthman Bellaire Chapel, 6700 Ferris.

Posted by Tom at 8:49 AM | Comments (0) |

Monkey see, monkey do

This is very interesting. And funny. Hat tip to Instapundit via Slashdot.

Posted by Tom at 7:46 AM | Comments (0) |


This NY Times article examines one of the most closely watched experiments in the publishing industry.

Rumbo (pronounced "ROOM-boh") has started four Spanish-language daily newspapers in Texas in the past year, starting in San Antonio before going to Houston, Austin and the Rio Grande Valley. Here is an earlier Houston Press story on Rumbo de Houston's entry into the local newspaper market.

According to most demographers, Hispanics will become a majority in Texas by 2030 or so and are already the largest ethnic group in several of the state's largest cities. Edward Schumacher Matos is a former Wall Street Journal editor who founded Rumbo last year with Jonathan Friedland, The Journal's former Los Angeles bureau chief. Their business plan is to have Rumbo profitable by late 2007 or early 2008. Their bet is that the state's growing Hispanic population is ready to support a sophisticated daily newspaper in Spanish that mixes coverage of local news and sports with commentary and dispatches from Latin America.

The Hispanic market already supports fast-growing Spanish-language television and radio industries, but Rumbo's Texas venture is clearly the biggest gamble yet that has been placed on the Hispanic demand for daily news in Spanish. Rumbo's combined circulation remains small (just under 100,000 a day), but the venture has already generated a market reaction in each of the markets Rumbo entered in recent months. The English language newspaper in each of those markets has reacted to Rumbo by creating or buying newspapers to compete with Rumbo's tabloids.

As an aside, I am going to be on a panel with Carlos Puig, managing editor of RUMBO de Houston, on February 19 at the Houston Bar Association's annual Law & the Media Seminar that will be discussing ways in which the media can maintain its independence in the face of legal and economic threats to it.

Posted by Tom at 6:44 AM | Comments (3) |


First it was the battle to fight off the Comcast bid.

Then, it was the trial of the corporate case of the decade.

Now, it's the book -- Disneywar: The Battle for the Magic Kingdom (Simon & Schuster; 2005) by James B. Stewart, the former Pulitizer Prize winning Wall Street Journal reporter and the author of Den of Thieves, which chronicled the insider trading scandals of the 1980's. According to this NY Times article, Mr. Stewart's new book is not going to be particularly complimentary of Disney CEO, Michael D. Eisner.

Regardless of one's opinion of Mr. Eisner's performance in running Disney from a business standpoint, everyone must concede that he does have a knack for keeping the company in the news.

Alas, yet another epitaph that few CEO's envision: "Kept company in the news."

Posted by Tom at 6:05 AM | Comments (0) |

A diplomatic coup?

Texan and U.S. Ambassador to Mexico Tony Garza is engaged to marry Marķa Aramburuzabala, who is reportedly Mexico's richest woman and who is dubbed "the Beer Queen."

Posted by Tom at 5:54 AM | Comments (0) |

Big deals brewing

Following on this post from last week, the boards of San Antonio-based SBC Communications Inc. and AT&T Corp. approved a mostly stock deal under which SBC will acquire AT&T for roughly $16 billion.

SBC's board approved the transaction Sunday evening, while AT&T's board approved it just before 1 a.m. Monday. The acquisition remains subject to approval by AT&T's shareholders and regulatory authorities, and is expected to close by the first half of 2006.

The deal would create the nation's largest telecommunications company. The merger will end AT&T's 130-year remarkable run as an independent company, which began with the invention of the telephone.

Meanwhile, the Wall Street Journal ($)is reporting this morning that MetLife Inc. is close to striking a deal for Citigroup Inc.'s Travelers Life & Annuity Co. in a deal that would probably be valued at around $12 billion.

Consolidation within the life insurance industry has been predicted for some time, but the predicted consolidation has not taken place as quickly as many have predicted. If the MetLife-Travelers' deal makes, that could trigger the predicted round of consolidation in the industry. The theory of the MetLife-Travelers' deal is that insurance companies can generate better profit margins by serving larger numbers of customers with essentially the same back-office systems and only incrementally larger sales forces.

Both these deals signal that the markets are coming back to the type of big-scale merger deals that had largely disappeared from the business landscape over the past three years.

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

January 29, 2005

More clear thinking on reforming corporate governance

Following on a thread that involved earlier posts here and here, Professor Ribstein expands in this post on his proposal for reforming corporate governance:

My solution to the problems of corporate governance is to put pressure on managers to distribute excess cash by increasing owner distribution and liquidation rights. Ironically, it is the corporate form's elimination of these partnership-type rights that Margaret Blair argues made modern business possible. I dispute that proposition here. In that article I also argue that thick sophisticated markets have made the giant corporation no longer as important as it once was.

You might well ask, if this is such a good idea, why haven?t we seen more of it ? e.g., partnership type provisions in corporate charters that mandate distributions? Why not more publicly traded LLCs?

My explanation is that the corporate tax and the ?double? tax imposed on corporate distributions reduce owners' incentives to insist on distributions even if requiring distributions would efficiently reduce managerial agency costs, and therefore be value-increasing in the absence of this tax. So I propose eliminating the bias favoring retained earnings inherent in the our current tax system. Firms would then be freer to move toward more efficient governance forms.

Professor Ribstein's focus on the detrimental effects of the double taxation of corporate profits raises an interesting incongruity of the related political issue.

The anti-business crowd rails against removal of the double taxation of corporate profits as an unfair concession to the rich capitalist roaders. However, the retention of corporate profits contributes to corporate blunders (such as HP's acquisition of Compaq) and Enron-type scandals, which the anti-business forces attempt to remedy through bigger government -- that is, shareholder lawsuits in the civil justice system, criminalization of questionable corporate actions in the criminal justice system, and greater governmental control in the regulatory system (i.e., Sarbox).

Thus, the anti-business crowd's opposition to removal of the double taxation on corporate profits has the unintended consequence of promoting bigger businesses and bigger business blunders that, in turn, require bigger government to control. I'm not sure where the anti-business forces want to go with all of this, but my sense is that "bigger in everything" is not the destination that they have in mind.

Also, check out Professor Bainbridge's additional cogent thoughts in this post on corporate governance issues, and also Professor Ribstein's follow up post. Likewise, Professor Bainbridge passes along this site where you can download the papers presented at a conference over the weekend that addressed these and other corporate governance issues. These are great resources.

Posted by Tom at 11:43 AM | Comments (3) |

Is it time for Drayton to sell the Stros?

Drayton McLane has done a pretty darn good job of running the Stros. During his tenure, the club has been in the top tier of performance among Major League teams and a consistent playoff participant or contender. Under his tutelage, the club developed a fine minor league system that has produced a number of solid Major League players. Drayton also did a good job of coordinating the approval and construction of a downtown ballpark that has generated attendance records. Although Drayton has made his share of mistakes, he is unquestionably the best owner that the Stros have had in their 40 year existence.

However, as I noted in previous posts here and here, I have suspected for awhile that Drayton is preparing to sell the Stros. Given that Drayton is the best owner in Stros' history, I have not heretofore considered rumors of him thinking about selling the club to be particularly good news. But based on developments over this past off-season, I am beginning to think that it may be time for Drayton to sell the club.

As noted in this earlier post, this off-season began with the resignation of Stros' general manager Gerry Hunsicker. Although I was more measured than some others about Drayton's failure to retain Hunsicker, it's certainly not a feather in one's cap that the best general manager in the club's history decided to move on after the best decade in the club's history.

Then came the ill-fated negotiations with free agent Carlos Beltran. With Hunsicker gone and new GM Tim Purpura just gaining his bearings, Drayton allowed Beltran agent Scott Boras to play him like a fiddle during the negotiations rather than making his best offer up front and then placing a relatively short deadline on Boras to consummate a rich deal or risk losing it. Consequently, when Drayton's initial low-ball offers for Beltran quickly went by the wayside, negotiations dragged on, preventing the Stros from taking care of other business, such as signing cornerstone stars Lance Berkman and Roy Oswalt to long term deals. When Boras gave Drayton only a couple of hours to respond to the Mets' final offer, Drayton was unprepared to play by Boras' rules and Beltran was gone. As noted here and here, the Stros are probably better off without Beltran at the price they would have had to pay for him, but that does not excuse Drayton from mishandling the negotiations in a manner that was detrimental to the club overall.

The first fallout from the mishandling of the Beltran negotiations was felt this week as Berkman and the Stros agreed to a one-year deal to settle Berkman's arbitration case. The failure to lock him up to a long term contract now places the Stros at risk of losing Berkman, who will be a free agent at the end of the upcoming season absent the signing of a new deal. Losing Berkman -- who has been one of the best hitters in the Major League Baseball over the past four seasons -- would be devastating to the Stros, who now will probably have to pay Berkman far more than they would have had to pay him had they not neglected to sign him to a long term deal earlier.

Just to give you an idea of the market for a player of Berkman's caliber, take a look at J.D. Drew, who is a player of roughly Berkman's age and experience, but who is not as durable as Berkman and is not quite as good a hitter as Berkman. Drew recently signed with the Dodgers for $11 million a year over five years. Given that, there is little reason for Berkman to settle for less than $60-$65 million over the same period because, if the Stros aren't willing to pay it, the Rangers almost certainly will. Chronicle sports columnist Richard Justice speculates that the Stros could have locked Berkman up for $30 million over three years as late as last season.

Meanwhile, the Stros remain at impasse with their best pitcher (Oswalt), whose arbitration demand of $7.8 million appears to be a clear winner over the Stros' $6 million offer. Absent the signing of a long term deal with the Stros, Oswalt can become a free agent at the end of the 2006 season.

So, after the best season in the club's history, the Stros now find themselves in turbulent waters. The club's best two players in history -- Bidg and Bags -- are closing in on retirement. The club lost out on its attempt to retain Beltran, who would have been one of the building blocks for the future. Meanwhile, the club's best two young players -- Berkman and Oswalt -- are at risk of being lost in the near future to the free agent market. Although potentially formidable, the club's pitching rotation for this upcoming season will nevertheless rely heavily on a 43 year old superstar (the Rocket), another veteran (Andy Pettitte) who is coming off of elbow surgery, and a converted outfielder (Brandon Backe) who has not yet proved that he can pitch effectively over the course of an entire season.

Thus, Drayton has his work cut out for him in steering the Stros through these turbulent waters. Given his handling of the Hunsicker, Beltran, Berkman and Oswalt situations, my sense is that he may be losing his enthusiasm for doing so. If that is the case, then here's hoping that Drayton sells the club before it is too late for a new owner to solve these quickly accumulating, and increasingly serious, problems.

Posted by Tom at 6:59 AM | Comments (1) |

Now, how did that happen again?

In what can only be described as the result of an embarrassing lack of oversight, a grand jury in Williamson County indicted six people yesterday for allegedly being involved in a strikingly simple scam of the state's electricity grid operator, the Electric Reliability Council of Texas ("ERCOT").

The five former top managers and one contractor at ERCOT billed the organization $2 million for work by shell security and computer-contracting companies that the individuals controlled, even though much of the work was not performed. The activities were first detailed last summer in a series of articles by The Dallas Morning News, which prompted questions around the state about whether anyone involved with ERCOT had ever heard of the concept of "financial controls."

All of the indicted individuals joined ERCOT as it grew rapidly in response to the introduction of electric competition in Texas in 2002. ERCOT's mission is to maintain the reliability of the Texas electricity grid and coordinate key pieces of the state's $20 billion deregulated electricity market. The nonprofit organization's $127 million annual budget is generated through mandatory fees paid by electricity customers or their power providers.

A state district judge appointed Texas Attorney General Greg Abbott in November, 2004 as special counsel in the case after the findings of an internal ERCOT investigation were disclosed to the Williamson County district attorney. At the same time, the judge impaneled the special grand jury in Williamson County, where ERCOT has its primary control center. ERCOT's headquarters are in Austin.

In announcing the indictments yesterday, Mr. Abbott said that the case is "far from over" and that additional indictments may be coming down the pike. Indictments make for good publicity, but I'm more interested in the identities of the people in ERCOT management, on the ERCOT Board, and at the Texas Public Utility Commission (ERCOT's regulator) who were asleep at the switch and missed such a simple scam. Funny how those names tend to get lost in the shuffle of indictments.

Posted by Tom at 6:07 AM | Comments (0) |

January 28, 2005

What? You mean a board member has to work?

In this earlier post on the corporate case of the decade, it was noted that the outcome of the Disney-Ovitz trial may provide yet another reason for competent businesspersons to avoid serving as independent directors on boards in a business climate that already makes it increasingly difficult to find qualified board members. My own anecdotal experience is that businesspersons are avoiding board membership in droves.

This timely Wall Street Journal ($) article confirms my experience as business leaders converging on Davos, Switzerland this week for the World Economic Forum tell the Journal that they are increasingly saying "no thanks" to serving as independent members on outside boards of public companies:

Such anecdotal evidence is borne out by some hard statistics. In 1997, the chief executives of S&P 500 companies served on average on two outside boards, . . . Today, that number has fallen to an average of less than one, or 0.9%, outside board seats, . . . Until recently, about one in four companies had policies limiting the number of boards their CEOs served on, . . . Today, more than half of companies have such policies, . . .

One of the examples that the article uses for explaining the reasons for declining independent board membership is the experience of Michael D. Capellas, the former Compaq Computer Co. CEO who served on the Dynegy, Inc. board while at the helm of Compaq:

Mr. Capellas's experience on the Dynegy board is a telling example of the changing dynamic of being a board member. While a director from May 2001 to June 2002, he recalls "we met four times a year [and] far less preparation was required. In fact, I would read the material the night before."

Today, Mr. Capellas says, "if you are going to be on a board, you have to attend many more board meetings" and the reading material is "much more voluminous." For example, the Dynegy board meets every other month, not counting about two other meetings via telephone, according to the company. What's more, Dynegy's current board members receive annual performance reviews by other board members.

Meanwhile, Mr. Capellas's compensation as a Dynegy board member paled when compared to his salary as Compaq's CEO. As a Dynergy director in 2001, he received an annual retainer of $30,000, plus $1,500 for each board meeting and $1,000 for each committee meeting. The same year, he was paid $3.8 million as Compaq's CEO.

And the risks were increasing. In September 2002, Houston-based Dynegy, among the energy companies caught up in the corporate scandals of recent years, paid $3 million to settle civil charges brought by the U.S. Securities and Exchange Commission over irregular energy trades and some financial transactions that had been used to burnish the company's financial results.

Though no directors were charged by the SEC in the September action, some current and former Dynegy directors have been named in related class-action lawsuits. Mr. Capellas, who quit the company's board three months before the SEC settlement, isn't a defendant in the class-action lawsuits. Since then, Dynegy has almost completely revamped its board, with 10 of its 12 directors joining over the last three years.

Mr. Capellas says he believes he and other Dynegy directors lived up to their responsibilities as board members. "I don't believe there was any lack of preparation," he says. "There were four board meetings scheduled but the board actually met many, many times. It's just that to do the bread-and-butter stuff today, you have a lot more work to do."

It is a sad commmentary on the state of American corporate governance when the main reason for declining board membership is that directors are concerned that they are not going to have the protection of the business judgment rule even after expending an inordinate amount of their time on the board matters.

Posted by Tom at 5:32 AM | Comments (0) |

It's Car Show time

Over 600 vehicles will be on display through Super Bowl Sunday on February 6 as the annual Houston Auto Show kicks off today at the Reliant Center convention facility at Reliant Park.

The Auto Show runs from noon through 10:30 p.m. today and next Friday, 10 a.m. through 10:00 p.m. the next two Saturdays, and noon through 7:00 p.m. the next two Sundays. From Monday through Thursday of next week, the show will run from noon to 7:00 p.m.

Tickets are $10.00 for adults (cash only) and children under the age of 12 are admitted free when accompanied by an adult. Tickets are sold only at the Reliant Center Box Office Halls B & D ticket windows, and the ticket windows open 30 minutes prior to show opening. There are no advance sales of tickets.

The Auto Show is always an entertaining affair, and the huge Reliant Center is a comfortable venue for such an exhibition. Check it out.

Posted by Tom at 5:05 AM | Comments (2) |

January 27, 2005

Can SBC eat AT&T?

San Antonio-based SBC Communications Inc. is in talks to acquire AT&T Corp., a combination that could create the nation's largest telecommunications company in an industry where companies are feverishly attempting to grow in an effort to keep up with new technologies and competitors.

So, over 20 years after the breakup of Ma Bell, the breakup may be coming full circle. SBC is now the second-largest U.S. regional phone company and one of the three huge telecoms to emerge from the consolidation of the Baby Bells. Although such a deal is fraught with hurdles before it could be consummated, the proposed merger would combine some of the largest pieces of the Ma Bell monopoly that was broken up in 1984. It appears that the primary attraction of the deal is linking SBC's 50 million local-line customers with AT&T's world-largest international fiber network and its large corporate client list.

The deal makes sense for AT&T because it is struggling to compete in the vicious long-distance price wars with MCI and the Baby Bells. Moreover, given AT&T's diminished role in the industry, the Justice Department would be unlikely to try and block such a merger. Probably the biggest industry issue is how other big telecommunications companies such as Verizon and BellSouth will respond, particularly since BellSouth had similar talks with AT&T in 2003 that did not result in a deal.

Posted by Tom at 9:49 AM | Comments (0) |

Making Congressional voting transparent

This post by Tom Mighell over at Inter Alia reminded me to pass along GovTrack (, a new site that will provide you email notification of up-to-the-minute information about Congress.

GovTrack differentiates itself from other sites devoted to Congress in that it sends users e-mail updates anytime there is activity on legislation that they want to monitor. GovTrack lets users track activity of specific legislators. It can also send updates via RSS, or Real Simple Syndication, which is the most efficient way to organize and review such updates, as well as blog updates. The site collects information from Thomas (, which is the Library of Congress's legislation tracking site, as well as the websites for the House of Representatives and the Senate. Check it out.

Posted by Tom at 8:19 AM | Comments (0) |

Ernst settles long pending Bank of New England malpractice claim

Ernst & Young LLP agreed to pay an $84 million settlement two weeks into the ongoing trial of a long pending malpractice lawsuit in Boston over its audit work more than a decade ago for the defunct Bank of New England Corp. Here is an article that set the stage for the trial.

The bank's bankruptcy trustee filed the lawsuit in 1993 accusing Ernst of malpractice, among other claims. The bank's demise was triggered by the January 1990 announcement that it would report more than $1 billion in previously undisclosed losses on bad loans for its 1989 fourth quarter. Just four months earlier, the bank had raised $250 million through a public debt offering. The bank filed a chapter 7 (i.e., a liquidation) bankruptcy case in January 1991.

The settlement is yet another reminder of the litigation pressures that the Big Four accounting firms are currently facing over big business failures. Here are earlier posts on Ernst's other legal problems over the past year.

Posted by Tom at 7:06 AM | Comments (0) |

Clear thinking on Social Security reform

The Bush Administration's initiative to reform the Social Security system has been criticized recently as being premature because the system is not really in crisis and there are more pressing fiscal problems, such as reforming the health care finance system. Well, Social Security is clearly not in as bad a shape as say, Medicare, but to put off reforming Social Security for that reason is akin to reasoning that there is no need to tend to that long overdue tune up of the family's better car because it seems to be driving better than the family's clunker.

In this Wall Street Journal ($) Capital column, David Wessel interviews Edward "Ned" Gramlich, a U.S. Federal Reserve governor who chaired the Social Security advisory commission during the Clinton Administration and is the former dean of the University of Michigan's School of Public Policy. Although not enamored of the Bush Administration's initial proposal for reforming Social Security, Mr. Gramlich nevertheless is a strong proponent for Social Security reform now:

I don't think the system is in crisis. But we can make much more desirable changes if they're made early. The problem with waiting until the car is about to go off the road is that our options are constricted. It's hard to make sensible benefit cuts if people have already retired or are close to retirement. It's easier to do if cuts are well-advertised. In the past, we have waited, the benefit system has expanded and we've raised the payroll tax. At some point, we can't do that.
We can do much more sensible things if we act early. But it's hard to generate the requisite urgency when the system is projected to be paying full benefits for the next 40 years or so. I'm not an advocate of the president's general approach, but I have sympathy for arguments that the president's people are making about the wisdom of acting now.

Read the entire interview.

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

The economics of extracting oil & gas

One of the most interesting (and misunderstood) aspects of the energy business is the economics of extracting oil and gas. Those economics not only have much to do with the price that we end up paying for energy, but also the success or failure of investing in a particular exploration project.

In this instructive Wall Street Journal ($) op-ed, Peter Huber and former Reagan administration staffer Mark Mills -- who are authors of the new book, The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy (Basic 2005) -- make an interesting point about why energy prices tend to gyrate from time to time:

Oil prices gyrate and occasionally spike -- both up and down -- not because oil is scarce, but because it's so abundant in places where good government is scarce. Investing $5 billion dollars over five years to build a new tar-sand refinery in Alberta is indeed risky when a second cousin of Osama bin Laden can knock $20 off the price of oil with an idle wave of his hand on any given day in Riyadh.

By simply opening up its spigots for a few years, Saudi Arabia could, in short order, force a complete write-off of the huge capital investments in Athabasca and Orinoco. Investing billions in tar-sand refineries is risky not because getting oil out of Alberta is especially difficult or expensive, but because getting oil out of Arabia is so easy and cheap.

Moreover, the authors point out that new technology is having a dynamic impact on the cost of extracting oil and gas:

The cost of oil comes down to the cost of finding, and then lifting or extracting. . . But these costs have been falling, not rising, because imaging technology that lets geologists peer through miles of water and rock improves faster than supplies recede. Many lower-grade deposits require no new looking at all.

To pick just one example among many, finding costs are essentially zero for the 3.5 trillion barrels of oil that soak the clay in the Orinoco basin in Venezuela, and the Athabasca tar sands in Alberta, Canada. Yes, that's trillion -- over a century's worth of global supply, at the current 30-billion-barrel-a-year rate of consumption.

Here is the entire piece. Also, Tyler Cowen over at Marginal Revolutions has this comment on Messrs. Huber and Mills' new book.

Posted by Tom at 6:03 AM | Comments (0) |

Juror Questionnaire in the Enron Broadband case

This is the questionnaire that prospective jurors in the upcoming Enron Broadband criminal trial will be given. Here are the prior posts on the Broadband case, which is scheduled to crank up on April 1 in Houston before U.S. District Judge Vanessa Gilmore.

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

January 26, 2005

Philip Johnson, RIP

Philip Johnson, the innovative architect whose collaboration with local Houston real estate developer Gerald Hines defined Houston's modern skyline, died Tuesday at the age of 98 in New Canaan, Conn. Mr. Johnson designed many buildings in Houston, including Pennzoil Place, Bank of America Center, Williams Tower, the Gerald Hines College of Architecture Building at the University of Houston, and the Rothko Chapel on the campus of the University of St. Thomas in the Montrose area of Houston, which was discussed in this earlier post.

Posted by Tom at 4:31 PM | Comments (2) |

Second Circuit reverses "Super Size Me" lawsuit dismissal

Super Size Me is the Morgan Spurlock documentary that chronicled Spurlock's health as he as he ate nothing but McDonald's food at least three times a day for a month. Although certainly not a balanced treatment of the fast food industry, Super Size Me is quite clever and certainly worth watching. Last week, the film was nominated for an Academy Award in the best Documentary Feature category.

One of the criticisms of Super Size Me was that it was a transparent attempt to promote frivolous lawsuits against the fast food industry, although the onslaught of such litigation has not occurred. Nevertheless, such lawsuits received a glimmer of light yesterday from the Second Circuit Court of Appeals. In this decision, the Second Circuit reinstated part of a highly publicized lawsuit that accused McDonald's of misleading young consumers about the healthiness of its products.

The Second Circuit's decision concluded that the trial judge in the case incorrectly dismissed parts of the lawsuit brought on behalf of two New York children on the grounds that the lawsuit complaint failed to link the children's alleged health problems directly to McDonald's products. For the trial court to dismiss the case on those grounds without a trial, the Second Circuit essentially held that such a ruling could only come in summary judgment proceedings after discovery and presentation of summary judgment evidence. Thus, the decision at least opens the door a crack for the plaintiffs' lawyers to demand in discovery from McDonald's the type of previously secret documents regarding the company's promotion of unhealthy products that ultimately led to a string of multi-billion dollar verdicts against Big Tobacco companies.

John F. Banzhaf III, a George Washington University professor of public-interest law who has advised plaintiffs in the big tobacco cases, is an unpaid adviser to the McDonald's plaintiffs in this case.

Despite McDonald's protestations to the contrary, Super Size Me has already had an effect the way in which McDonald's promotes its menu. In early 2004, McDonald's removed the "super size" option from the menus of its 13,000 U.S. restaurants and it began promoting a new line of premium salads. The company also began promoting milk as an alternative to soft drinks and sliced apples as a substitute for French fries in its famous Happy Meals for children.

I suspect that those apples have not competed particularly well against McDonald's French fries. ;^)

Posted by Tom at 4:18 AM | Comments (0) |

January 25, 2005

The end of the imperial CEO?

Don't miss the discussion between the two foremost corporate law experts in the blawgosphere -- Professor Bainbridge and Professor Ribstein (with an update here) -- over the implications to the corporate model of the Hewlett-Packard Co. Board's deliberations over limiting HP CEO (and notorious micro-manager) Carly Fiorina's managerial role in the company. Here is the Wall Street Journal ($) article and a free CNN Money article on the HP Board's discussions.

Professor Bainbridge suggests that the HP Board's actions foreshadow the end of the Imperial CEO era, while Professor Ribstein observes that HP's troubles indicate a fundamental problem with the way in which control decisions are made within the inflexible corporate structure.

Meanwhile, HP shares are flat at $19.95 in morning trading on the New York Stock Exchange. In comparison, HP's closing stock price was $18.22 on May 6, 2002, the day on which the company finalized its merger with Compaq Computer Corp that Ms. Fiorina orchestrated over strenuous opposition from several of HP's longtime directors. Thus, two and a half years after Ms. Fiorina had HP pay $19 billion for Compaq, the market attributes virtually no value to the acquisition.

Given that scoresheet, it appears that HP has succumbed to both an Imperial CEO and a broken business model. In this Wall Street Journal column, Jesse Eisinger essentially says the same thing, and passes along this comment about Ms. Fiorina's performance:

Ms. Fiorina has had more than 2½ years since completing the merger in May 2002 to make it work. But H-P is still stuck in between high-end services provider IBM and master of the PC-as-commodity market Dell.

"I'm not sure anyone could have pulled this off," says Merrill Lynch analyst Steve Milunovich. "I wouldn't give her a high grade, but I wouldn't call her a disaster."

Alas, few CEOs envision epitaphs reading, "Not Disastrous."

Posted by Tom at 8:56 AM | Comments (0) |

PW pays $87.5 million settlement in Safety-Kleen case

Houston business plaintiffs' firm Susman Godfrey recently obtained an $87.5 million settlement from Big Four accounting firm PricewaterhouseCoopers in connection with a negligent misrepresentation claim of over $1 billion that arose from Laidlaw Environmental Services' ill-fated 1999 takover of scandal-ridden Safety-Kleen Corp.

Susman Godfrey represented a syndicate of lenders headed by Toronto Dominion Bank that provided almost $3 billion in financing to Laidlaw in connection with the Safety-Kleen adverse takeover. Shortly after Laidlaw acquired the company, Safety-Kleen filed a chapter 11 case amidst revelations of an internal accounting scandal. As a result of the scandal and Safety-Kleen's reorganization, the value of the bank syndicate's loans declined dramatically.

The banks sued PW and alleged that the loans would not have been made but for the fact that PricewaterhouseCoopers had provided audit reports indicating that Safety Kleen was financially healthy. PricewaterhouseCoopers contended that Safety-Kleen's management had misled it in connection with the audits (former Safety-Kleen executives were sanctioned by the SEC and at least one criminal proceeding arose from the scandal), and that besides, the banks had not relied on the PricewaterhouseCoopers' audits anyway in making the loans to fund the takeover. The case settled on the courthouse steps before trial last October, but the details of the settlement are just now becoming public.

The settlement is interesting in that it was came in mediation after the parties had engaged in a summary jury trial last May, in which the parties engage in a non-binding, streamlined presentation of their cases to a jury, which then gives each side feedback on how the jury would decide the key fact issues in the case. Although not used nearly enough in complex litigation, summary jury trials are an efficient and effective tool for parties involved in such mattrs to assess the risks of proceeding to trial versus a pre-trial settlement.

Posted by Tom at 7:57 AM | Comments (0) |

Remembering Johnny

Don't miss former Tonight Show writer Raymond Siller's piece on Johnny Carson in today's Wall Street Journal ($).

Posted by Tom at 3:36 AM | Comments (0) |

January 24, 2005

Only in Houston

A decade or so ago, a soliciter from London came over to Houston for the first time in his life to appear in federal court with me on a case that we were handling for a mutual client.

My friend was quite surprised by Houston's huge trees, numerous lakes, bayous, and wildlife, particularly near my home in The Woodlands. He candidly admitted that even most sophisticated Londoners have the misconception that Houston is in the Wild West of movie lore, located in the sagebrush and dusty desert terrain of far West Texas. This Chronicle article won't do much to correct similar misconceptions:

A police officer who struck a runaway horse on a freeway was critically injured early today, authorities say.

Several other motorists struck the horse's carcass on Interstate 45 before police could shut down the freeway's northbound lanes.

The injured officer, who was off-duty and driving a personal vehicle, managed to pull over to the side of the freeway after the collision but the top of his car was sheared off by the impact, said David Gutierrez, a Houston Police Department accident investigator.

He said the horse was running southbound in the northbound lanes of I-45, just north of the I-610 loop, when the first collision occurred.

The injured officer, who had to be rescued from his vehicle using the Jaws of Life, was listed in critical condition at Ben Taub General Hospital's trauma center.

It was unknown how the horse got on the roadway.

While investigators were waiting for Harris County animal control officers to remove the horse, several other vehicles struck the carcass.

Posted by Tom at 9:17 AM | Comments (6) |

Don't let those facts get in the way of the agenda

As noted in earlier posts here and here, U.S. District Judge Vanessa Gilmore of Houston is currently presiding over a rather ugly criminal case in Houston against against three people accused in the deaths of 19 illegal immigrants who were being smuggled into this country in the back of a blistering hot trailer.

As noted in the earlier posts, Judge Gilmore and the prosecution have not been getting along very well during the course of this prosecution. After Judge Gilmore's earlier threat to hold the prosecutors in contempt of court for failing to divulge internal Justice Department deliberations regarding the decision to seek the death penalty against one of the defendants, the prosecution filed a writ of mandamus (that's like suing the judge) with the Fifth Circuit Court of Appeals requesting the appellate court to order Judge Gilmore, in effect, to quit jacking with the prosecution over communications that are clearly privileged. The Fifth Circuit agreed with the prosecution, and issued this pointy-edged 22 page opinion that, among other things, is clearly a rather sharp rebuke of Judge Gilmore's treatment of the prosecution in the case.

On the heels of that dust-up, the Houston Chronicle ran this editorial last week on the matter that contains so many errors and misleading statements that it is questionable whether the author had even bothered reading the Fifth Circuit's decision before writing the editorial. Kevin Whited over at dissects the Chron editorial and, in so doing, establishes that the Chron editorial page is certainly not going to allow facts to get in the way of its political agenda.

Posted by Tom at 6:07 AM | Comments (0) |

To regulate or not to regulate? That is the question

The New York Times sometimes has trouble sorting out business news items because of its bias in favor of greater government regulation over capitalist roaders.

On one hand, this NY Times Sunday article on the struggling airline industry suggests that perhaps the solution to the industry's problems is to return to the era of regulation in which consumers paid higher prices, but airlines served better food on the flights. The only "experts" in the article quoted in favor of returning to those bygone days of high prices and limited service areas are union representatives, who believe that the higher-paying jobs of the regulation era are the birthright of airline workers. Hardly a mention is made of the fact that such increased regulation would bring increased costs to an industry that certainly doesn't need more of those.

From a consumer standpoint, airline deregulation has been a remarkable success that has resulted in far cheaper prices and much greater service than ever before. Thus, while the Times' premise for the article is that increased regulation could help the struggling airlines and their workers, the better premise would have been the following -- i.e., despite the great success of deregulation, why are so many airlines continuing to struggle and why is it so difficult to put the chronically unprofitable airlines out of their misery?

On the other hand, this Times article notes that an unintended consequence of the increased regulation of public corporations under the Sarbones-Oxley legislation is that an increasing number of public firms are delisting because of the high cost of compliance with the legislation. Thus, as Professor Ribstein notes in this typically insightful post on the same article, "we can add a decline in disclosure as firms delist and withdraw from mandatory disclosure requirements" as further negative consequences of Sarbox.

For most businesses, the primary benefit of going public is the access to cheaper equity capital. Sarbox's increased cost of compliance is effectively making that public equity capital more expensive and less attractive. Business owners don't go public just for the joy of making public disclosures and dealing with class action plaintiffs' lawyers.

Posted by Tom at 4:45 AM | Comments (0) |

January 23, 2005

On Bullshit

Harry G. Frankfurt is an emeritus philosophy professor at Princeton, and he has just published a new book, On Bullshit (Princeton 2005). Here is the product description:

Deleted at Professor Frankfurt's request.

Here is a shorter paper by Professor Frankfurt regarding the same subject matter. Hat tip to the Legal Theory Blog for the link to this fascinating analysis of bullshit.

Posted by Tom at 1:01 PM | Comments (0) |

Remembering Auschwitz and Dachau

Samuel Pisar is an international lawyer and author Of Blood and Hope (MacMillan 1979), who is probably best known for his advocacy of free trade between the U.S. and Russia. However, Mr. Pisar is also one of the youngest survivors of the Nazi death camps at Auschwitz and Dachau. Don't miss Mr. Pisar's Washington Post op-ed on the 60th anniversary of the liberation of the death camps. Wise words from a gentleman who truly understands the inherent depravity of man.

Posted by Tom at 11:42 AM | Comments (0) |

Perot on Perot

This Dallas Morning News article interviews H. Ross Perot, the founder of Electronic Data Systems, the founder and chairman emeritus of Perot Systems Corp., the two-time U.S. presidential candidate, and -- depending on your point of view -- either the Texas legend or the lengendary Texas quack.

The best book on Mr. Perot is Gerald Posner's Citizen Perot (Random House 1996). Although not as good as Posner's definitive Case Closed (Random House 1994) on the John F. Kennedy assassination, Citizen Perot nevertheless provides a generally balanced of one of the most complex, colorful, crafty figures on the American political and business landscape over the last 25 years of the 20th century.

Perot is fascinating from a business standpoint not only because of the billions he made as a pioneer in data processing and Texas real estate, but also because of the millions he lost in naive and ill-fated ventures. Although often a savvy and skillful business operator, Posner's book quotes colleagues who describe Perot as as "squirrelly" and "paranoid." Nevertheless, Perot is not one to allow his critics to gain an advantage, so he made fun of them by dancing in public to Patsy Cline's famous rendition of Willie's Nelson's classic song, Crazy.

In Citizen Perot, Posner does a fine job of delineating Perot's contradictions. One one hand, Perot can be incredibly generous to employees needing medical help, but he was also known for berating loyal workers viciously. During the 1992 Presidential campaign, he criticized the influence of Washington lobbyists, but he hired the best in the lobbying business to help EDS and Perot Systems secure business deals in Texas, Washington, and internationally. Perot promoted an outsider political image, but he exerted tremendous influence upon past presidents and presidential campaigns. One of the most memorable descriptions of Perot came from Posner's interview with Ken Riedlinger, a longtime executive of EDS:

"I like Ross. He saved my life a couple of times. But I also hate Ross. Yet I voted for him. And I would probably go back to work for him tomorrow if he asked."

Other interesting parts of the Perot legacy are his 1979 rescue mission to Iran, his private battles with business and government leaders he considered corrupt, his animosity toward George H.W. Bush, and his paranoid charges of Republican dirty tricks against his daughter during the 1992 campaign. Indeed, Perot's performance during the 1992 Presidential debates -- along with Bill Clinton's formidable debating skills -- made those debates the most entertaining of any since that format was introduced during the 1960 Presidential campaign.

After his second and less successful presidential race in 1996, Perot has all but disappeared from the public scene. He now concentrates on his family, veterans' causes, and "big picture" business projects. Nevertheless, he remains a consummate storyteller, which makes the DMN interview a good read. Check it out.

Posted by Tom at 11:30 AM | Comments (0) |

January 22, 2005

Velvel on blogging

Lawrence R. Velvel is the dean of the University of Massachusetts Law School and writes an interesting blog called Velvel on National Affairs. This earlier post referred to one of Dean Velvel's earlier posts relating to the plagiarism scandal at Harvard Law School.

In this recent post, in the course of complimenting this Joseph Ellis op-ed regarding what George Washington would recommend as goals for the Bush Administration's second term, Deal Velvel provides one of the most insightful descriptions of the power of blogging that I have seen:

Frankly speaking, I assume -- I don?t know this, but am assuming it -- that the column got into the papers in the same way that the book and newspaper industries normally work together. That is to say, to flog sales publicists at big name publishers ask big name newspapers to carry a column by a big name author relating to the subject of a new book the author wrote. Because the publisher and the author are big names, the big name newspaper agrees. This typical arrangement is symptomatic of the symbiotic elephantiasis which exists everywhere in this nation and is ruining the country: It is typical of the fact that, in every walk of life, only the huge in size, huge in money, huge in reputation, and/or huge in connections can really get anywhere.

This fact, incidentally, is one of the reasons for the rise of the poor man?s printing press called The Internet, which gives a small opening to people who are otherwise shut out regardless of competence -- just as, conversely, others are insiders regardless of competence.

Posted by Tom at 11:19 AM | Comments (0) |

The risks of the Texas-Mexico border

This Washington Post article reports on a troubling development that many Texans prefer to ignore -- that is, the increasing number of missing persons who are being abducted in the Mexican border towns along the border of Texas and Mexico.

21 U.S. citizens have been kidnapped or disappeared between August and December of last year. Of those 21, nine were later released, two were killed, and 10 remain missing. Moreover, law enforcement officials report an alarming rate of kidnappings that are occurring across Mexico, including what are dubbed "express" kidnappings that are performed for "quick cash" ransoms.

The Rio Grande Valley of Texas -- or "the Valley" as Texans call it -- has always been a fascinating and troubling part of Texan culture. Larry McMurtry portrayed the late 19th century version of the area brilliantly in his Pulitzer Prize winning novel, Lonesome Dove, which was made into one of the best television mini-series of all time in 1989 with Robert Duvall and Tommie Lee Jones in the main roles. Filmmaker John Sayles provides an equally remarkable portrayal of the area during the 1950's and 1980's in his fine 1996 film, Lone Star, which includes Valley native Kris Kristofferson in the flat out best performance of his acting career. The area is among the lowest in terms of per capita income in the United States, yet even that chronically depressed economy is a fantasy of riches for many of those living in the poverty of the teeming Mexican border towns.

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.

Posted by Tom at 7:21 AM | Comments (0) |

The real reason for the Jenn-Brad split

There just had to be more to the breakdown in the Jennifer Aniston-Brad Pitt marriage than the MSM has been reporting. This Watley Review piece reveals the true reason for the breakup:

"Brad's always been a fan of Wittgenstein," confided Hanson Terrell, an assistant at the Plan B production company co-owned by the pair. "You know, kind of abstract, more focused on issues of language and so on. Jennifer, on the other hand, is a pure Karl Popper fan, all pragmatism. It's kind of amazing they got married in the first place."

"She felt Brad was screwing around with her, that when he stared into space at the beach he wasn't resolving apparent paradoxes through analyzing their phrasing, but instead checking out the brunette in the thong," said gossip columnist Mark Lisanti of The Defamer.

Posted by Tom at 6:57 AM | Comments (1) |

January 21, 2005

ACLU quandry

This NY Times article reports on an interesting struggle that is developing within the American Civil Liberties Union board of directors.

I wonder whether the ACLU will represent the board members against the ACLU in protesting the ACLU's attempt to chill their free speech rights? ;^)

Posted by Tom at 7:22 AM | Comments (0) |

Brobeck Trustee sues firm's former partners

This article reports on the avoidance lawsuits that the bankruptcy trustee of the former high tech law firm Brobeck, Phleger & Harrison is filing against the firm's former partners for bonuses and a portion of the firm's unpaid bank debt.

The key issues in pursuing former Brobck partners is when the firm became insolvent and whether partners took money out of the firm for inadequate consideration. Under the California Corporations Code, limited liability partnerships may make distributions to partners only when the total assets of the firm exceed liabilities.

The trustee contends that Brobeck's income began to decline in 2000, a decline that accelerated during the second half of that year and continued until the firm tanked in September, 2003. Although Brobeck's net per-partner income dropped to $245,000 for 2002, the trustee contends that Brobeck's partners did not correspondingly reduce the distributions they received.

According to the trustee, in 2001 and 2002 alone, Brobeck's partners spent more than $100 million more than the firm's net income on partner distributions and leasehold improvements. Brobeck financed these excess distributions through debt, which increased from $34 million and $173,000 per partner in 2000 to $89 million and $505,000 per partner in 2002. In particular, the trustee asserts that Brobeck borrowed an additional $39 million on its credit line in the first quarter of 2002 and distributed over $43 million to its partners during the same time period.

Posted by Tom at 6:40 AM | Comments (0) |

Noonan and Ignatius on the Inauguration

Following Paul Gigot's thoughts in this post from yesterday, Peggy Noonan writes this Opinion Journal op-ed today regarding President Bush's Inaugural speech, in which she observes the following:

There were moments of eloquence: "America will not pretend that jailed dissidents prefer their chains, or that women welcome humiliation and servitude, or that any human being aspires to live at the mercy of bullies." "We do not accept the existence of permanent tyranny because we do not accept the possibility of permanent slavery." And, to the young people of our country, "You have seen that life is fragile, and evil is real, and courage triumphs." They have, since 9/11, seen exactly that.

And yet such promising moments were followed by this, the ending of the speech. "Renewed in our strength -- tested, but not weary -- we are ready for the greatest achievements in the history of freedom."

This is -- how else to put it? -- over the top. It is the kind of sentence that makes you wonder if this White House did not, in the preparation period, have a case of what I have called in the past "mission inebriation." A sense that there are few legitimate boundaries to the desires born in the goodness of their good hearts.

One wonders if they shouldn't ease up, calm down, breathe deep, get more securely grounded. The most moving speeches summon us to the cause of what is actually possible. Perfection in the life of man on earth is not.

Along the same lines, David Ignatius of the Washington Post observes in this op-ed:

The late congressman Phil Burton of California used to say that government officials got in trouble when they began to believe that all the show and pomp of Washington was "for real." By that, he meant that officials were led astray when they began to think it was about themselves and their party rather than the nation. That delusion is especially easy in a second term, after four years in the adulatory echo chamber of the capital. Just ask survivors of the Nixon administration.

Posted by Tom at 5:51 AM | Comments (0) |

Updating the Yukos case -- Judge Clark postpones Yukos discovery

U.S. Bankruptcy Judge Leticia Clark denied OAO Yukos' request Thursday to commence discovery in regard to its claims for damages against several international financial institutions and Russian entities pending a February 16th hearing on OAO Gazprom's motion to dismiss the Yukos chapter 11 case in Houston for lack of jurisdiction. Here are the previous posts on the Yukos saga.

Although the MSM heralds the decision as a setback to Yukos, it's really not. Judge Clark recognizes that it is inefficient to allow expensive discovery to commence before she has decided whether the Bankruptcy Court has jurisdiction over the Yukos case. There will be plenty of time for discovery if she decides that Yukos' chapter 11 case can move forward in the American bankruptcy system.

That's really the big issue in the case -- i.e., whether the acceptance of Western investment capital by Russian business interests will bring with it the corresponding risk of having such capital protected in the American civil justice and bankruptcy systems? If Judge Clark rules in favor of Yukos on that issue, how long will it be before the Russian government is hiring lobbyists to support Republican Congressional initiatives for tort and bankruptcy reform?

Posted by Tom at 5:11 AM | Comments (0) |

January 20, 2005

Cert petition filed in Roe v. Wade case

As noted in this previous posts, Norma McCorvey of Dallas, the original plaintiff in the seminal anti-abortion case Roe v. Wade, has been attempting over the past couple of years to persuade the federal courts to allow her to challenge the original judgment in that case under Fed. R. Civ. P. 60(b). In this opinion from last year, the Fifth Circuit Court of Appeals upheld the District Court's rejection of Ms. McCorvey's Rule 60(b) motion on procedural grounds and dismissed the case, although Fifth Circuit Judge Edith Jones' concurring opinion did address some of the substantive issues pertaining to the underlying case.

Now, as noted in this AP article, Ms. McCorvey has asked the U.S. Supreme Court to reverse the lower courts and direct the District Court to grant her Rule 60(b) motion. Here is a link to the cert petition, courtesy of the excellent SCOTUSblog.

Due to the procedural nature of the challenge to Roe v. Wade, my sense is that the cert petition does not have much of a chance of success at the Supreme Court. Nevertheless, stay tuned. Stranger things have happened.

Posted by Tom at 8:12 AM | Comments (0) |

The Martha Redemption?

In Frank Darabont's wonderful movie, The Shawshank Redemption (1994), unjustly imprisoned Andy Dufresne ends up making some pretty decent money while in prison.

In an ironic twist in regard to another unjust imprisonment, this NY Times article reports that the value of Martha Stewart's stake in Martha Stewart Living Omnimedia has nearly tripled -- from about $320 million to around $830 million -- since her conviction last year.

Markets are sweet, aren't they?

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

Gadzooks is liquidating

Carrollton-based Gadzooks, the teen fashion retailer that has been wandering aimlessly in chapter 11 since February of last year, announced yesterday that it would sell its assets to the highest bidder and give up on its dream of reorganizing and emerging from chapter 11.

As in the recent case of sandwich franchisor, Schlotzky's, Gadzooks' liquidation will generate a pittance in comparison to the company's debt, which means that unsecured creditors will likely receive no dividend on their claims against the company.

The business risk of highly-leveraged and specialized companies such as Gadzooks is perhaps best articulated by the reaction of one of my two teenage daughters, both of whom are both experts in the area of purchasing from teen fashion retailers. Although dismayed last year when Gadzooks went into the tank, when I mentioned the latest news about Gadzooks' final demise, one of my girls turned to me and observed with no remorse:

"Oh, yeah. I remember that store. They were toast a long time ago."

Posted by Tom at 6:34 AM | Comments (1) |

Except Southwest, airlines continue to reel

Several major airlines reported quarterly earnings yesterday, and the reports continue to verify what everyone already knows -- the legacy airline business model is broken and in need of such serious reorganization that it is questionable whether many can or should survive.

While American Airlines parent AMR Corp. and Northwest Airlines reported another round of large fourth-quarter losses, even industry profit leader -- Dallas-based Southwest Airlines -- reported a 15% profit decline. That Southwest's profits are declining underscores the grim outlook for the entire industry -- of the 10 largest U.S. carriers, only Southwest is expected to report a fourth-quarter profit.

Houston-based Continental Airlines, Inc. reported a fourth quarter loss of $206 million. Continental is implementing a plan to generate $1.1 billion in savings and expand its more profitable international flights. The carrier is also negotiating $500 million in worker wage and benefit concessions that it needs to have in place prior to the end of the first quarter of 2005 to help defray further losses.

All airlines carriers are being hammered by an unusual combination of high fuel prices, fare competition and growing seat capacity in the U.S. market. Had it not been for fuel hedges that saved Southwest $174 million in the quarter, it also would have reported a quarterly loss.

Meanwhile, the other discount airlines that have generated the brutal low-fare competition are also being stung by declining fares as quarterly losses are expected from America West Holdings Corp., JetBlue Airways, AirTran Holdings Inc. and Frontier Airlines. THe primary reason that the other discounters are not profitable is that they do not have the liquidity of Southwest to hedge fuel costs.

Southwest's quarterly profit fell to $56 million (or seven cents a share) from $66 million last year. Revenue totaled $1.66 billion, which was an increase of about 9% compared to the fourth quarter of 2003. Southwest's unit costs in the quarter fell 1.3%, or 4.5% excluding fuel.

With several airlines wallowing in chapter 11 cases without clear reorganization plans, is 2005 the year that the needed shakeout in the airline industry will take place?

Posted by Tom at 5:50 AM | Comments (0) |

Can the Republicans lead?

In this brilliant op-ed today, Wall Street Journal ($) editorial page editor Paul Gigot throws down the gauntlet and challenges the Republican Party to elevate substance over form and show that the party can lead America. In a stinging rebuke of the party's leadership over the past generation, Mr. Gigot lays it on the line for the Republicans:

Whatever one thinks of its policies, the Democratic Party surely made a difference during its 20th-century heyday. Set aside its last, corrupted years in power. When liberalism was ascendant, from the 1930s through the 1970s, Democrats permanently altered the face of government.

They ended poverty for the elderly with cross-generational entitlement programs, broke Jim Crow's hold in the South with civil-rights laws, built the alphabet soup of regulatory agencies that bedevil American business every day, turned our courts into quasi-legislative bodies, and planted the seeds of government-run health care that continue to grow today. As the party of government, they built institutions and processes that have consistently expanded its scope.

What, in the decade since they've retaken the House, have Republicans done that is consequential in the same way? If the GOP majorities vanished tomorrow, what couldn't Democrats easily repeal? I've asked the latter question of numerous Republicans in recent days, and the only confident answer I get is "welfare reform." By requiring in 1996 that the poor enter the world of work, Republicans stopped the development of a permanent American underclass. Yet despite that historic success, it is striking that they still haven't had the nerve or clout to pass an extension of even that reform through the Senate. . .

In fact, it is depressing to consider how much of what Republicans wanted to do under a Democratic president in the '90s they have abandoned now that they control both sides of Pennsylvania Avenue. The regulatory reform requiring "cost-benefit" analysis that came within a vote of passing the Senate in 1995 has never returned. The excellent Medicaid reform vetoed by Bill Clinton has also gone nowhere, despite pleas from many governors to revive it. The Freedom to Farm Act was gutted.

Even the congressional budget process that Democrats designed to make spending easier remains entirely unchanged. Fourteen years ago, Congressman Chris Cox was able to win upward of 180 votes for such budget changes; last year he got 88, and he had to buck the rest of the GOP leadership to get even those.

Some of this can be blamed, first, on having a Democrat in the White House, and later having only small majorities on Capitol Hill, especially in the Senate. But not anymore. After November's victory, Republicans don't have any more excuses.

Read the entire piece. Mr. Gigot's point is a variation on the theme that Milton Friedman touched on awhile back:

To summarize: After World War II, opinion was socialist while practice was free market; currently, opinion is free market while practice is heavily socialist. We have largely won the battle of ideas (though no such battle is ever won permanently); we have succeeded in stalling the progress of socialism, but we have not succeeded in reversing its course. We are still far from bringing practice into conformity with opinion.

With a Republican president and solid majorities in both houses of Congress, the Republicans no longer have any excuses for failing to address America's pressing problems in such areas as health care finance, tax policy, and intelligence reform, to name just three.

The Republicans have exploited the Democratic Party's obsolescence in these areas to seize the reins of leadership. Now, it is time for the Republicans to lead or risk, as Mr. Gigot puts it, becoming "as evanescent as the Whigs."

Posted by Tom at 5:20 AM | Comments (1) |

January 19, 2005

Tim Purpura's first big challenge

Now that the Stros' dance with Carlos Beltran is over, new Stros General Manager Tim Purpura can finally get on with showing us what he can do in the job.

The Stros did not handle the Beltran negotiations particularly well, but my sense is that the course the Stros charted in those talks was owner Drayton McLane's call, not Purpura's. At any rate, as noted in earlier posts here and here, the Stros are probably better off without Beltran at the price they would have had to pay for him, so McLane allowing Scott Boras to play him like a fiddle didn't really hurt the Stros other than from a public relations standpoint.

But now Purpura has a chance to prove his mettle and it's not going to be easy. Yesterday, Roger Clemens and his long-time agent, Randy Hendricks, handed Purpura a record $22 million record arbitration demand. Clemens had a magical 2004 season pitching for his hometown team and won the NL Cy Young Award to boot, so he has a reasonable case that he should be the highest-paid pitcher in baseball. Inasmuch as Randy Johnson is currently the highest paid pitcher for the 2005 season at $17 million, that's just a bit below the midpoint between Clemens' bid price and the Stros' $13.5 million offer. Thus, if a settlement is to be reached, expect it to be a tad above Johnson's salary.

However, the bigger problem for the Stros than funding Clemens' salary is that Clemens has not decided whether he wants to play at any price. That complicates the Stros' arbitration negotiations with Lance Berkman and Roy Oswalt, who are more important players than Clemens for the long term health of the club. Berkman's arbitration demand was $11 million, which is only a million more than the Stros' $10 million offer, so expect that case to be settled before the arbitration hearing. Oswalt requested $7.8 million and the Stros offered $6 million, so that split is a bit bigger, but still not large enough to risk an acrimonious hearing with the club's best pitcher. So, expect that case to be settled, too.

Purpura's problem is that the $8.5 million salary range in the Clemens case is about 10% of the Stros' projected 2005 payroll. Thus, the Stros are about a month away from Spring Training and they still don't know whether they will have three top players locked up for a bit more than $30 million or closer to $40 million. Moreover, until the Clemens salary is finalized, Purpura does not have as much flexibility in finalizing settlements with Berkman and Oswalt.

So, Purpura is facing his first big challenge as the Stros' GM. How well he handles it will not only have an impact on whether Houston enjoys another season from one of the best pitchers in Major League Baseball history, but also whether the club's two under-30-year-old All-Star quality players will continue to be the club's foundation over the next 5-7 years.

Welcome to the big leagues, Mr. Purpura.

Posted by Tom at 6:27 PM | Comments (0) |

Least surprising motion of 2004 denied

U.S. District Court Sim Lake (picture here) today issued an order denying former Enron Corp. CEO and COO Jeffrey Skilling, former Enron Chairman Kenneth Lay and former Enron Chief Accounting Officer Richard Causey's motion to transfer venue of their upcoming criminal trial out of Houston. That motion was the subject of this earlier post. Here is Judge Lake's opinion.

Posted by Tom at 2:25 PM | Comments (0) |

Enron, the documentary

As noted several times on this blog, the most popular book on the Enron affair to date has been the one written by Fortune reporters Bethany McLean and Peter Elkind, Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio 2003). If you want to read just one book on the Enron scandal, then Smartest Guys is the book for you.

Now, the Houston Chronicle reports that Smartest Guys is the basis of a documentary that will debut later this month at the Sundance Film Festival in Utah. Filmed by Alex Gibney, who is probably best known for producing the documentary -- The Trials of Henry Kissinger (2002) -- based on Christopher Hitchens' searing book, The Trial of Henry Kissinger (Verso 2001), it does not appear from the following Sundance website description of the film that Mr. Gibney bothered to review any of Professor Ribstein's writings on the portrayal of business in film in preparing the documentary:

Watching Enron: The Smartest Guys in the Room is a little like watching the outcome of a Super Bowl on ESPN Classic. Although you already know the final score, you're still captivated by the drama of the game, entertained by the characters, and fascinated by the behind-the-scenes revelations. And Enron is indeed an engrossingly dramatic tale, especially as depicted in all of its exquisite detail by director/screenwriter Alex Gibney. The story of Enron is not simply a cautionary tale about greed and corruption. Nor is it a story that we are unlikely to witness again, for the rise and fall of Enron is as American as apple pie.

With this film, based on the book of the same title, Gibney has fashioned a history lesson that takes us "inside" the headquarters of the seventh-largest corporation in the United States and illustrates through a series of rapidly paced interviews, corporate footage, and news reports, the "new economy" of the 1990s: a climate where companies sold ideas rather than widgets, and a corporate culture where ethics became as old fashioned and out of date as value investing. Densely packed, with a world of information for the sophisticate and neophyte alike, Enron is riveting, muckraking filmmaking that should make any culture critic of the 1990s proud.

Hat tip to Charles Kuffner for the link to the Chronicle article.

Posted by Tom at 9:14 AM | Comments (0) |

Only in New York

In a rare moment of candid introspection, the NY Times concedes that only New York could come up with a political race where Robert F. Kennedy Jr., the son of the late senator, would run for state attorney general (to replace Eliot Spitzer, of all people) against his brother-in-law, Andrew Cuomo, who is getting a divorce from Mr. Kennedy's sister, Kerry.

When I mentioned this to my wife, she thought I was talking about an episode in a T.V. sitcom.

Posted by Tom at 7:39 AM | Comments (0) |

Why hasn't the Disney-Ovitz case settled?

Given the high stakes of the ongoing Disney-Ovitz trial, a reader asks Professor Ribstein that question, and the Professor speculates that the reason is the importance of the case. Having been involved in similar high stakes cases, that's certainly one of the reasons that the case has not settled. However, the non-settlement is also likely a result of the D&O insurer's investment banking analysis of the case.

In short, the Disney D&O insurer probably concluded before trial that the Disney defense has a good chance of winning the case. Thus, not only does the insurer salivate at the thought of knocking the plaintiffs' damage claims out entirely, the insurer views the risk of a damages judgment in excess of the D&O policy limits as remote. That's important because the insurer is likely responsible for any such judgment in excess of policy limits if, before the case went to trial, the insurer declined the directors' demand to settle the case within policy limits {which demand is almost always directed to the insurer in such cases) and the plaintiffs actually offered a settlement within policy limits (such an offer is almost always made in such cases). Thus, the Disney directors are probably not too concerned about a judgment in excess of policy limits that might expose their personal assets to pay a portion of the judgment.

Inasmuch as the Disney D&O insurer views the defense case as strong and the risk of a judgement in excess of policy limits as remote, the insurer figures that the probable wide gap in settlement positions within policy limits before trial made taking a flyer on knocking the plaintiffs' claims out completely a reasonable risk. In that regard, the Disney case differs from the recent settlements involving Enron and Worldcom directors, where the insurers recognized that they were going to end up paying policy limits regardless of whether the cases settled or went to trial. Therefore, the insurers' sole goal in those cases was to remove the risk of an outcome where the insurers might be liable for damages in excess of policy limits. The "policy limits" settlements accomplish that goal.

Update: Be sure to check out Professor Ribstein's typically insightful response, particularly his point about the insurer's interest in risking an adverse judgment in the Disney case to promote the clarity of result that makes future underwriting decisions easier. Good stuff.

Posted by Tom at 7:00 AM | Comments (0) |

More Econoblog -- Social Security reform

The Wall Street Journal ($) is continuing its interesting Econoblog series, in which the WSJ hosts two experts in economics debating hot issues of the day. In this most recent segment, bloggers Arnold Kling and Max Zwicky debate the merits of Social Security reform. This is a first rate discussion of the issue, and includes further reading materials on the Social Security system. Don't miss it.

Posted by Tom at 6:41 AM | Comments (0) |

John Keegan on the current situation in Iraq

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 newest 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 talks about war, pull up a chair an listen.

In this Daily Telegraph op-ed, Mr. Keegan provides a pragmatic analysis of the American-British approach to the war and elections in Iraq. In so doing, he disabuses several popular notions about the war effort, including the notion that the current violence in the Sunni Triangle and Baghdad reflect larger problems with the war effort:

Regarded solely as a military operation, the Iraq war of 2003 was a scintillating success. It is the aftermath that has sowed doubt among those who supported the decision to risk an attack.

Casualties among the Western forces have risen. Casualties among Iraqis have risen even higher and continue to rise; not, however, for the reasons foreseen by the anti-war party. It is not conventional force or conventional defence tactics that end lives, but something quite different, which may be called large-scale terrorism, largely by car bombing, suicide bombing and the assassination of Iraqis who co-operate with Westerners.

This is not a new development. What is going on in Iraq resembles the second Palestinian intifada, though it is more intensive and better organised. It is also more difficult to counter, since the Western forces lack the detailed intelligence to which the Israeli security forces have access.

Mr. Keegan also puts to rest the increasingly popular notion that America's involvement in Iraq is "becoming another Vietnam:"

Some critics of Western occupation policy are raising the idea that Iraq is becoming a Vietnam, a popular thought with old-style opponents of American foreign policy, but quite inaccurate. What America confronted in Vietnam was ideological nationalism, organised at several levels, political and military, all ultimately depending on the Vietcong's ability to defeat the enemy by conventional methods. There is absolutely no equivalent in Iraq of the Vietcong main force and its battalions of highly motivated infantrymen.

With his powerful historical perspective, Mr. Keegan goes to explain the source of the Iraqi opposition, the difficulties involved in quelling it, and the threatening nature of the upcoming elections to that opposition. These are compelling and thoughtful points of a true clear thinking expert on the nature of war. Check out the entire article.

Posted by Tom at 6:17 AM | Comments (0) |

The Bush Administration's second term agenda

This Economist article does an excellent good job of summarizing and analyzing the Bush Administration's second term agenda.

Posted by Tom at 5:49 AM | Comments (0) |

Handy scorecard

Given the number of criminal trials of high-profile corporate executives that are upcoming, it's become a bit difficult to keep up with all of them without a scorecard. Thus, the Wall Street Journal ($) has provided one for us. Check it out.

Posted by Tom at 5:13 AM | Comments (0) |

January 18, 2005

Enron bankruptcy CEO takes over at Krispy Kreme

Krispy Kreme Doughnuts Inc. took a big step closer to chapter 11 today as it announced that its chairman and chief executive, Scott A. Livengood, retired and that turnaround expert and current Enron CEO, Stephen F. Cooper, was named CEO and a director.

Steven G. Panagos -- who works with Mr. Cooper at his consulting firm, Kroll Zolfo Cooper LLC -- was also named president and chief operating officer of Krispy Kreme.

Somewhat surprisingly, the news sent Krispy Kreme's shares soaring in mid-morning trading today. Expect that speculation to reverse itself as the reality of the situation becomes clearer over the next several days.

Krispy Kreme has been hammered over the past year by a gradual slowdown in sales and multiple investigations of its accounting practices and franchisee acquisitions. Here are the prior posts on the trendy doughnut maker's demise.

Mr. Cooper and his firm are well-known in bankruptcy and corporate reorganization circles, as evidenced by the firm's involvement in the high profile Enron chapter 11 case. Mr. Cooper and his firm will likely recover more than $100 million once their work is completed in the Enron reorganization.

Posted by Tom at 12:14 PM | Comments (0) |

Harvard Prof not impressed with Enron directors' settlement

Lucian Bebchuk is a professor at Harvard Law School and a co-author of Pay Without Performance: The Unfulfilled Promise of Executive Compensation. In this NY Times op-ed, Professor Bebchuk takes dead aim at the recent Enron directors' settlement and he does not like what he sees:

With Enron, the failure of the board had disastrous consequences, leading to the second largest bankruptcy in American history and shaking investor confidence. It is difficult to envision a stronger case for imposing a meaningful financial penalty on directors. Yet the settlement fails to do so.

The settlement hardly heralds a new era in which directors who fail to act in shareholders' interests pay the price. If even Enron's board members are treated this gently, then other corporate directors can rest easy.

Professor Bebchuk has a point, but it's a bit simplistic. The main mitigating factor in the Enron directors' settlement is Enron's liberal D&O insurance policy, which is the primary source of funding for the settlement. In the absence of such a liberal policy, plaintiffs' lawyers would hold out for larger contributions of personal assets from individual directors, such as occurred in the directors' settlement in the Worldcom case, where the directors' contributed 20% of their non-exempt net worth.

After Enron, Worldcom and other corporate scandals, liberal D&O policies are rare and more costly. Without that hedge to the risk of director liability, the risk to outside directors has racheted up considerably, as this recent WSJ ($) article reflects. So, it would appear that the market indications are quite contrary to Professor Bebchuk's conclusion that outside directors can "rest easy" with regard to their risk of director liability.

Posted by Tom at 9:05 AM | Comments (0) |

US Airways = Eastern?

This Washington Post article reports on the seemingly simple choice that US Airways machinists face this week -- either they can approve the carrier's latest contract proposal calling for pay, benefit and job cuts or they can turn down the contract and walkout, which might just send the struggling airline into liquidation. That part of the article is fascinating as the WaPo reporter attempts to present in a coherent manner the machinists' position that they would prefer to lose their jobs than making the concessions necessary to help keep the airline afloat so that they can keep their jobs.

But what is even more interesting is the article's comparison of the US Airways situation with that of Eastern Airlines, which former Continental Airlines CEO Frank Lorenzo attempted to steer through a chapter 11 case during the late 1980's. Although Mr. Lorenzo successfully reorganized Continental under chapter 11, he failed in regard to Eastern, which ultimately liquidated amidst internecine labor disputes.

My sense is that putting US Airways out of its misery would be a positive step for the long term health of the U.S. airline industry. Nevertheless, it is utterly amazing to watch the rationalizations that workers will come up with in such reorganizations to explain why they should push the liquidation button at the expense of their own jobs. Why would not it be better than simply losing their jobs entirely for the recalcitrant workers to negotiate a small equity stake in the reorganized airline in return for giving up their jobs to hungrier workers who want them? Or stated more simply, why do the workers feel compelled not only to shoot themselves in the foot, but to shoot their entire foot off?

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

The developing infrastructure to service HSA's

Health Savings Accounts ("HSA's") are still a new concept in health care finance, but McKinsey & Company partners Paul Mango and Vivian Riefberg write in this Wall Street Journal ($) article that there are promising developments in the insurance infrastructure that suggest that HSA's are going to have a larger effect on America's broken down third party payor system of health care finance than many experts are currently predicting.

The authors point out that the quickly emerging financial industry surrounding HSA's will eventually compete effectively with typical third party payor health insurance and that this competition will force traditional insurers to improve their performance or suffer. After describing four areas of the financial service industry that are developing in regard to HSA's, the authors observe the following:

In each of these four businesses, incumbent health insurers' positions are open to attack from new entrants. They will need to decide whether to try to build the new skills themselves, acquire them, or partner with others. The growth and popularity of the new HSAs is exceeding expectations, so resolving these questions quickly will be vital. Insurers, asset managers and banks have already announced several key acquisitions and alliances that will exclude others from locking up the best partnerships.

The smart money is already moving fast to stake out its place in the new marketplace. Hold on for what promises to be an interesting ride.

Could several large traditional health insurers that fail to adapt to the changing marketplace in health care finance turn into the health care insurance equivalent of legacy airlines? Stay tuned.

Posted by Tom at 7:33 AM | Comments (0) |

January 17, 2005

Criminalizing greed, dishonesty, and mendacity

Last week, I received the following email from a reader who was responding to this earlier post:

You had this comment on your website, today.
"In what alternative reality is it that a busy law dean and expert on ethics can be expected to spot accounting fraud?"
Do you recall that Tom Peters sent his MBA back to Stanford because the its Dean who had taught him accounting was the Chairman of the Enron Audit Committee. It is not that these people are too lazy or overworked; its greed, dishonesty, and mendacity.

For those who do not follow the Enron affair closely, Robert Jaedicke is the former Stanford Business School dean who was the chairman of the Enron Board's audit committee during the period in which it approved Enron's transactions with Andrew Fastow's infamous special purpose entities that were used to create between $30 and $40 billion of off-balance sheet debt. Tom Peters is a well-known author and management specialist who at one time inquired about sending his MBA back to Stanford as an objection to Mr. Jaedicke's Congressional testimony, but I don't believe he ever followed through on it.

Over the weekend, I have been trying to come up with a thoughtful reply to the above email. Then, this morning, I discovered that Professor Ribstein has already performed the task for me in his typically insightful manner. Check it out.

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

Gingrich takes on health care issues

This NY Times article reports on former House speaker Newt Gingrich's interest in reforming American health care and health care finance. Nothing earth shattering here, but it's good to see a leading conservative thinker examining issues -- particularly in the health care finance field -- that desperately need attention.

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

Paul O'Neill on Social Security reform

Former Bush Administration Treasury Secretary Paul O'Neill criticized the Bush Administration for a lack of meaningful policy analysis in his book, The Price of Loyalty. Mr. O'Neill is a bright and independent thinker about matters of financing governmental policy, so it's prudent to consider his ideas carefully.

In this NY Sunday Times op-ed, Mr. O'Neill proposes a debt-financed transition of the current Social Security system under which those younger than their mid-thirties would save in broad-based, low-cost index funds, on a trajectory that would return to them a $1 million annuity at retirement. Mr. O'Neill calculates that this would would require about $1 trillion in temporary financing. In short, stop the existing system for new entrants, phase out the existing system as older citizens die, and cover the transition costs with debt to be repaid out of the absence of traditional benefits to the younger entrants in future years. This is a similar plan to the one that Arizona State economics professor and Nobel Prize winner Ed Prescott proposed in this earlier post.

The most interesting observation in the op-ed is Mr. O'Neill's blunt and disdainful analysis of the politics of Social Security reform:

As I write this I can imagine the chorus of pundits saying, "This isn't politically possible." Why not? Because it is too complicated for people to understand? Or because the only way to approach change in our society is through small incremental steps, like the president's tepid notion of a limited, voluntary diversion of Social Security taxes into small private accounts?

Baloney, I say. What stands between a truly worthy aspiration for our society and its realization is political leadership with the courage to dream big.

Posted by Tom at 5:58 AM | Comments (0) |

January 16, 2005

Looking upstream and downstream in prosecuting accounting fraud

This this NY Times article reported last week that nine executives from a several food supply companies have been charged with crimes for their part in a revenue pumping scheme at U.S. Foodservice, a subsidiary of the Dutch company Royal Ahold N.V.. All the executives are accused of participating in a scheme to inflate U.S. Foodservice's profits by confirming to the company's auditors that the company was owed millions of dollars more in rebates than was actually the case. According to the article, most of the executives are expected to plead guilty.

The U.S. Foodservice case reflects a growing trend in white collar criminal prosecutions -- i.e., employees of a company doing business with a target company being accused of participating with the target company's employees in an accounting scheme to inflate the target company's profits. The same approach was taken in the recent Enron-related Nigerian Barge case, in which four Merrill Lynch executives were convicted of participating in an accounting fraud with various Enron sharpies.

On the surface, the cases appear to be similar. The U.S. Foodservice prosecution appears to involve blatantly fraudulent conduct in which vendor representatives falsified documents so that U.S. Foodservice auditors would be misled regarding the true amount of the company's revenues. The documents were clearly false because the vendors had no legal obligation to provide the rebates set forth in the documents. Based on the false documents, the U.S. Foodservice's auditors booked illusory revenue that inflated profits.

Similarly, the Nigerian Barge case also involved an oral side deal that was not disclosed to Enron's auditors. As a result, the government successfully contended at trial that Enron was able to take advantage of the accounting benefit of selling the three Nigerian energy production barges to Merrill Lynch even though it secretly remained obligated to repurchase the barges. But for non-disclosure of the oral side deal, Enron would have had to book lower than expected earnings, which would have resulted in lower stock price, lower compensation to the executives involved, etc.

Thus, the two cases appear to have much in common -- false documents, undisclosed side deals, and false disclosures to auditors. But the nuances reflect significant differences between the cases, and those differences point to the dangers of criminalizing common business transactions, particularly in the anti-business environment fueled by anti-Enron animus.

Unlike the apparent false documents in the U.S. Foodservice case, there was a real question during the Nigerian Barge trial whether the contract under which Enron sold the barges to Merrill Lynch was true or false. This is particularly important because the written contract included a standard provision that specifically provided that any prior oral agreements between the parties -- which would include the oral side deal in which Enron agreed to repurchase the barges -- were superceded by the written contract that included no such obligation. Thus, if the written contract was enforceable, then Merrill Lynch could not have required Enron to repurchase the barges. If Merrill could not have enforced the oral side deal, Merrill was truly at risk with regard to the transaction, and Enron's accounting for the transaction was at least arguably correct. If that's the case, then what's the crime?

Undaunted, the Nigerian Barge prosecution trotted a few former Enron executives who had previously copped pleas to the witness stand to testify regarding the existence of the oral side deal and to opine that Merrill was not truly at risk with regard to its acquisition of the barges. The prosecution put on no evidence that the written contract was unenforceable. Rather, the prosecution focused the jury on the horrors of Enron and the bad judgment that a couple of the Merrill Lynch defendants had used in investing personally with former Enron CFO Andrew Fastow in a special purpose entity that ultimately ended up with the barges. Finally, the prosecution case was buttressed by U.S. District Judge Ewing Werlein's questionable decision to exclude a key defense expert, who would have opined that Merrill Lynch was truly at risk in regard to the barge transaction because the written contact rendered unenforceable the oral side deal for Enron to repurchase the barges.

In the end, the jury in the Nigerian Barge trial convicted five of six of the defendants, including all four of the former Merrill Lynch executives. Interestingly, the Enron in-house accountant -- who was the only defendant in the case who ratified the supposedly faulty accounting of the underlying transaction to Enron's auditors -- was acquitted. The trial court's ruling that excluded the defense expert testimony regarding Merrill's risk in the underlying transaction will be one of the central issues on the appeal of the convictions.

Thus, few would quibble with the proposition that clear fraudulent conduct should be vigorously prosecuted. But such clear cases of criminal fraud should not be confused with ones that are based more on playing to the jury's anti-business bias than proving the fraudulent nature of the underlying transaction. The difference is that the type of conduct that apparently occurred in regard to U.S. Foodservice would surely be prosecuted regardless of what companies were involved. However, it is highly unlikely that the defendants involved in the Nigerian Barge case would have ever been prosecuted had any company other than Enron been involved in the underlying transaction.

Posted by Tom at 11:52 AM | Comments (0) |

January 15, 2005

Baylor-Methodist split -- heading to court?

Todd Ackerman reports in this Chronicle article on the latest flare-up in the divisive Texas Medical Center divorce of Baylor College of Medicine and the Methodist Hospital after a highly-productive 50 year marriage. Here are the earlier posts on this increasingly acrimonious split.

The latest salvo in the divorce was the accusation by Baylor President Peter Traber that Methodist's new medical school affiliate -- Cornell Medical School -- is meeting with Baylor professors to induce them to leave Baylor for Methodist and Cornell. The Chronicle reports that Dr. Traber's letter made the following accusation:

"Cornell has been actively involved in trying to convince Baylor faculty members to leave the college. The dean of Cornell has personally visited with and/or contacted Baylor faculty members in an attempt to recruit them to the Methodist Physician Organization and Cornell faculty positions."

Legal translation: "Knock off the bribes or else we're going to lay a tortious interference lawsuit on your lap."

Other than the accusations of unethical conduct, things are just fine between Baylor and Methodist, as the Chronicle article notes:

Oddly, both Traber and [Methodist President Ron] Girotto reported that recent negotiations ? they resumed last week after mediators threw up their arms in December ? were the most productive they've had.

Posted by Tom at 8:03 AM | Comments (0) |

The option the Stros were wise not to grant

Professor Sauer over at the Sports Economist blog has brought in some additional blogging mates. From their initial posts, the new bloggers are going to be making some nice contributions to this already smart blog.

In this first post, new blogger Brian Goff analyzes the "no-trade" clause demand that has been widely reported as one of the reasons why the Stros' negotiations with Scott Boras over Carlos Beltran reached impasse shortly before the deadline to consummate a deal.

Professor Goff insightfully points out that the no-trade demand was in the nature of an option in which Boras was demanding that the Stros' take on additional risk with regard to the Beltran contract. The reason that this may have been a sticking point in the negotiations is that such options are notoriously difficult to price in baseball contracts, and the valuation is different between the player and the ballclub. This is undoubtedly correct, although the pricing on this particular no trade clause probably was made a bit easier by the fact that Boras only needed to protect Beltran for the time until 2009, at which point Beltran could have vetoed any trade as a 10 and five player under the MLB Collective Bargaining Agreement.

So, regardless of whether the no trade demand was a dealbreaker, the Stros have lost out on a player who sure would have looked good next to Berkman and Oswalt in a Stros' uniform for years to come. But as noted in this earlier post, a good case can be made that the Stros are better off over the long haul in failing to make the deal.

Beltran's career numbers are .284BA/.353OBA/.490SLG over seven MLB seasons. Those are excellent numbers, but its hard to make that performance justify a $17 mil a year contract over the next the next seven years. In comparison, Vladimir Gurrerero's statistics through seven seasons -- and just a year before he signed a $70 million, five-year deal with Anaheim -- were .322/.386/.588. Guerrero is not as good a fielder as Beltran, and questions about his back certainly held down his value a bit. But the Angels still got a player with noticeably better career hitting stats for $3 million a year less than the Mets will be paying Beltran.

So, while Beltran's career stat line might take off, my bet is that the Mets will be paying a boatload of money for Beltran by the end of the decade while not getting anywhere close to the hitting production that they had hoped for. In other words, sort of like the Stros' current situation with Bags.

The Stros are clearly in a rebuilding mode after a very good run over the past decade. Had the club been able to sign Beltran at the Mets' price for just a couple of years, then the Stros should have pulled the trigger and done the deal. That would have meant that Beltran's deal would have been coming off the Stros' payroll at about the same time as Bags and Bidg retire, leaving the Stros with the payroll flexibility to make some moves to transition into the post Bidg-Bags era.

On the other hand, if the Stros had signed Beltran, they could have found themselves in a similar financial straightjacket in 2010 that they presently face with Bags. Although the Stros will not be as good a hitting club in 2005 without Beltran (and, frankly, they were not all that good a hitting team until the last 45 games of the 2004 season), the $100 million they saved on not signing him gives the club the liquidity it needs to make several constructive personnel moves over the next couple of seasons. If the Stros make those moves prudently, then they will likely rebound just fine from the disappointment of not signing Beltran.

As many a savvy businessman has confirmed to me over the years, sometimes the best deal for the company is the one that gets away.

Posted by Tom at 7:50 AM | Comments (0) |

January 14, 2005

HP combines PC and printer units

Despite the fact that the market attributes virtually no value to its $19 billion acquisition of Houston-based Compaq Computer Corp two and a half years ago, Hewlett-Packard Co. announced today that it is combining its printing unit with its personal-computer division, effectively ending speculation for the time being that the company might sell various units of the company and refocus primarily on its profitable printing unit.

HP shares rose 1 cent to $19.96 in morning trading on the New York Stock Exchange. In comparison, HP's closing stock price was $18.22 on May 6, 2002, the day on which the Compaq merger was consummated. This has led one sage analyst to remark that "HP paid $19 billion for the privilege of hardly making any money" in the personal computer business.

As noted in this earlier post, HP chairman Carly Fiorina publicly stated last month that the company's board had considered breaking up the technology giant on three different occasions. However, Ms. Fiorina, who was the leading advocate of the Compaq acquistion, stated that the board each time decided the company's diversified portfolio of technology products helped the company to moderate business fluctuations in the cyclical technology sector.

H'mm. I doubt any of those fluctuations in the technology sector to date would have cost HP the $19 billion it spent on Compaq.

Posted by Tom at 12:45 PM | Comments (0) |

Bill Gates or Steve Jobs, can you please help?

This NY Times article reports on the FBI's longstanding and intractabe computer network problems. Amidst the dismay over the national security concerns that this problem presents, there is a good thesis topic here for some public policy grad student somewhere.

Posted by Tom at 7:58 AM | Comments (0) |

The lagging reform movement in corporate governance

The NY Times' Kurt Eichenwald, who has been covering the Enron scandal and other post-Dotcom business busts over the past several years, reviews in this NY times article the current status of the lagging government reform movement in regard to corporate governance.

Although the article accurately summarizes the fits and starts of such governmental reforms, it does not get to the real heart of the matter until almost the end:

The problem, . . . is that shareholders - the true owners of a corporation - are virtually powerless to effect change in a board unless they begin expensive and hard-to-win proxy battles. Shareholders are not given the right to vote for an alternative candidate for director, or to vote against one advanced by the company. They can either vote yes, or not vote at all.

Responding to such concerns, the S.E.C. proposed rules essentially allowing shareholders to propose their own candidates for director in companies with proven weaknesses in their procedures for electing directors. At the time it was introduced, William H. Donaldson, the S.E.C. chairman, heralded the proposal as a "significant step."

Quickly, the proposal brought widespread opposition from the business community, which argued that the effort was intended to allow unions with huge stakes in corporations through their pension funds to force social policy issues to the forefront on corporate boards.

"We think introducing a special-interest agenda into the boardroom isn't good governance or good for shareholders," said Mr. Hirschmann of the Chamber of Commerce.

Here, Mr. Eichenwald misses the point. He sees a political battle in what is really a problem of investors and their counsel lazily relying on an obsolescent business model. As Professor Ribstein, one of the blawgoshere's foremost experts on this issue, commented in this recent post:

I believe an important lesson from all this is that our current model of corporate governance just isn?t working, and that we delude ourselves if we think that Sarbanes-Oxley is going to fix it. . .

Among other problems, Sarbox banks on an absence of conflicts, not the presence of expertise and incentives to actually do a good job. . .

As for expertise, corporate boards will continue to be the playgrounds of do-gooder social responsibility activists who have other things on their minds than actually understanding and doing the nitty gritty of business and finance. In what alternative reality is it that a busy law dean and expert on ethics can be expected to spot accounting fraud? . . . all the other layers of responsibility our laws impose just increase the opportunities for shirking and finger pointing.

So what?s the answer? First, we need high-powered market-based incentives that would be provided by the return of an active market for corporate control. Second, as I?ve been saying (e.g., here) we need to encourage alternative business structures that take near-absolute power over corporate earnings away from corporate executives and give it to the firm?s owners.

Professor Ribstein's thoughts are spot on. The reform that truly needs to occur is in the marketplace as investors and deal lawyers reevaluate the the way to implement the controls necessary to protect the investor's investment. That reform is going to take time due to the practical difficulties of changing existing businesses to a better structure. But over time, this reform will have much more far reaching and effective results in the marketplace than anything that government can come up with.

A good way to start this reform movement is for investors to begin demanding of their counsel that they require more responsive business structures as a condition of their investment. The desire of a entreprenuer to raise capital for his business often overwhelms the entreprenuer's desire for an inefficient and value-limiting business structure. But investors need to take the lead in demanding the more efficient structures. Otherwise, the current status quo of reliance on the inefficient corporate model will continue.

On a related issue, don't miss Professor Bainbridge's comments here on how the traditional business judgment rule is being gradually peeled away to foist increased liability on outside directors.

By the way, it was a rather large oversight that Mr. Eichenwald did not approach Professor Ribstein or Professor Bainbride for their comments on these issues. A little Googling while researching the issues would have helped. ;^)

Posted by Tom at 7:08 AM | Comments (0) |

Galveston's Jack Johnson

In this NY Times Book Review, David Margolick reviews Geoffrey C. Ward's new biography on Galveston's Jack Johnson, who was the first black heavyweight champion of the world. Johnson's story is an enthralling and important tale.

When Johnson first won the heavyweight championship at the relatively advanced age (for a boxer) of 30 in 1908, it was one of the most important dates for African-Americans between Emancipation and the Civil Rights movement of the 1960's. At the time, the mere idea of a black man being the heavyweight champ sent many people into a panic, including more than a few in the press corps. When retired heavyweight champ Jim Jeffries was persuaded to make an unwise comeback to take on Johnson late in 1908, Johnson's throttling of the over-the-hill Jeffries triggered some of the nation's worst race riots of the early 20th century.

Inasmuch as Johnson endured a substantial risk of being lynched at some of his fights, his prominence and feats staked new ground for many black Americans, who were still just a half century removed from slavery. During this week in which the modern news media has been expressing outrage at Randy Moss' touchdown celebration last Sunday at Green Bay, it is important to remember that such silliness likely would have prompted far worse consequences in America less than a century ago.

Stylistically, Johnson was the precursor of Muhammad Ali. He developed artful footwork and movement to avoid the bull charges of the other heavyweights of the era, which was dominated by brawlers. Although the media of the era acknowledged Johnson's physical strength, standard racial stereotypes of those times held that black fighters lacked substance and would wilt when truly tested. The fearless and provocative Johnson took that stereotype and stood it on its head.

After he lost the title, Johnson -- who died in a car crash in 1946 at the age of 68 -- became a frustrated and embittered man, who in his later years even turned on the American legend, Joe Louis. As a result, Johnson alienated himself from even the generally supportive African-American community of the times, which was much more comfortable with the soothing presence of Mr. Louis. It was not until after Ali took a page from Johnson's free-spirited ways in promoting his boxing career that historians began to reassess the meaning of Johnson's life and societal impact. That process continues with Mr. Ward's new book, as well as Ken Burns' new documentary, The Rise and Fall of Jack Johnson: Unforgivable Blackness, which premieres on PBS on January 17 (next Monday).

Check out this fascinating story about a remarkable Houston-area native. You will not be disappointed.

Posted by Tom at 5:41 AM | Comments (0) |

Note on comments

I've had to close comments for the time being to thwart a fairly large comment spam attack over the past couple of days.

Inasmuch as my blog requires that I approve all comments before they are published, the comment spammers' spam never makes it on to the site. You would think that they would ply their spam elsewhere, but the robots they set up to send out such drivel don't know that the spam doesn't ever get published. So it goes.

Posted by Tom at 5:11 AM | Comments (0) |

January 13, 2005

Thatcher resolves messy business involving the wild world of Equatorial Guinea

As noted in this earlier post, Mark Thatcher (or "Sir Mark" as he is typically referred to in England), son of former British prime minister Margaret Thatcher, had been caught up in the wild world of Equatorial Guinea (prior posts here), where the enticing combination of rich energy deposits and corrupt local governmental officals led the mercurial Mr. Thatcher to get caught up in a coup attempt last year. Here is the Telegraph's article on the matter.

Well, according to this BBC News account, it appears that Sir Mark has been able to take care of that dirty business in South Africa with a fine and a suspended sentence. Despite the plea bargain, do not expect the Thatcher family to be vacationing in Equatorial Guinea anytime soon.

Posted by Tom at 6:48 AM | Comments (2) |

Andrew Beal, the contrarian banker

The Wall Street Journal ($) has this profile today on Andrew Beal, the Plano-based banker who has made a name for himself over the past decade of so placing contrarian bets on lending and bond business plays. Here is an earlier D Magazine Online profile on Mr. Beal.

Mr. Beal is definitely not your typical banker. He is a college dropout who never earned an M.B.A. He never worked for a big company learning the ropes. In the 1970's, he operated a business that bought old homes, remodeled them, and then sold them at a profit, which led him to get into the banking business in the late 1980's. Mr. Beal now owns 100% of Beal Financial Corp., which is a bank holding company with combined assets of $7.8 billion and a net worth of more than $1.7 billion.

One interesting characteristic of Mr. Beal is his penchant for Texas hold'em poker, as the Journal profile relates:

Mr. Beal has other interests in Las Vegas. Since 2000, he has been visiting casinos to play marathon sessions of Texas hold 'em poker against some of the world's top gamblers. Participants say Mr. Beal sits practically immobile for hours. He wears sunglasses and headphones to shut out voices, so he won't inadvertently betray a clue about his hand by making eye contact or chatting.

Other players say he lost several million dollars in these games, though a winning spree last spring brought him close to break-even. Mr. Beal doesn't dispute that account. He is known for blasting away with big bets even if he has bad cards, sometimes inducing opponents with better hands to fold.

"It's almost as if he's playing with disdain for the value of money," says one opponent, Doyle Brunson, a former poker world champion. Mr. Brunson, a legendary bluffer in his own right, calls Mr. Beal "a very difficult person to play against."

Posted by Tom at 6:27 AM | Comments (0) |

More on the SCOTUS sentencing guidelines decision

The dust is settling on the U.S. Supreme Court's decision yesterday in United States v. Booker and United States v. Fanfan that the federal sentencing guidelines are unconstitutional because they violate a defendant's Sixth Amendment right to be tried by a jury.

Congress enacted the guidelines almost 20 years ago on the theory that the guidelines would standardize prison sentences and make them fairer nationwide. However, the law of unintended consequences took over. As demagogues began advocating long prison sentences, the guidelines evolved largely into an arbitrary and capricious mess that unwisely restricts judicial discretion in sentencing, leading to absurd sentences in cases such as in the sad case of Jamie Olis. The SCOTUS decisions, set forth in two 5-4 rulings, gives broader discretion back to federal judges by relegating the guidelines to advisory in nature.

Despite the demagogic posturing "to be hard on crime" that inevitably follows such a Supreme Court ruling, the decision is the right one. Earlier this year, the American Bar Association's Justice Kennedy Commission, a distinguished panel of legal scholars and jurists, recommended repealing the mandatory sentences and restoring guided discretion for judges in sentencing, which allows judges to consider the unique characteristics of offenses and offenders that warrant increased or decreased prison time.

Moreover, apart from the troubling moral issues relating to capricious sentencing, such sentencing has also caused practical problems. The harsh sentences that were being meted out under the guidelines has caused big problems in the federal prison system where, according to the Bureau of Prisons, more than half of the 180,000-plus people in federal institutions are there for drug law violations. Most are small-time and nonviolent offenders who are serving long sentences pursuant to the myopic guidelines. Annual federal incarceration costs are estimated at $26,696 per inmate, which translates to about $4 billion annually.

The Supreme Court previewed yesterday's ruling last year by striking down in Blakely v. Washington the State of Washington's sentencing guidelines that were similar to the federal guidelines. Both sets of guidelines directed judges to boost sentences based on exacerbating factors such as the defendant playing a leadership role in a crime, acting with deliberate cruelty, or the infamous "market effect" of the crime. The standard for deciding whether to include these "enhancements" under the guidelines was merely a preponderance of the evidence as determined by the judge, rather than the "beyond a reasonable doubt" standard that juries are required to use in convicting a defendant. Yesterday's ruling held that that mandating such enhancements violated the constitutional right of defendants to a trial by jury.

Unfortunately, the Supreme Court majority that decided that issue could not reach a consensus on whether the guidelines should be overturned entirely or simply rendered advisory in nature. So, a new five-justice majority in a second opinion held that the guidelines should stay almost entirely intact, except for a few provisions that made them mandatory. The second decision also gives federal appeals courts specific guidance on reviewing disputed sentences. The key determinant is the "reasonableness" of the original sentence, although it's far from clear how district courts will interpret that concept in the sentencing context.

Although yesterday's decisions are helpful to federal defendants whose sentences are currently under review, the decisions will not result in an onslaught of appeals relating to past sentences meted out under the guidelines. The Supreme Court dashed those hopes by making clear that its decision will not apply retroactively to sentencing decisions that had reached final resolution. Of the estimated 180,000 federal prisoners, only several thousand have cases on direct review, which means that most federal prisoners will not be able to seek a shorter sentence, at least for time being. Moreover, the vast majority of federal sentences are doled out under plea bargains in which the defendant is required by the plea agreement to waive the right to challenge the sentence.

As noted in yesterday's post, Professor Berman's blog is the best place to review more thorough analysis of the implications of these decisions. Take a look there over the next few days as he and other sentencing guideline experts provide their views on the implications of these decisions.

Posted by Tom at 5:08 AM | Comments (0) |

January 12, 2005

SCOTUS rules on sentencing guidelines

The Supreme Court ruled today in this decision in U.S. v. Booker that the federal sentencing guidelines must satisfy the standards of the Sixth Amendment as applied in the Court's earlier ruling in Blakely v. Washington. Accordingly, the Supreme Court has set aside two provisions of the guidelines that made them mandatory.

Here is the initial NY Times article on the Supreme Court's decision, but for more thorough analysis of the decision, check out Professor Berman's blog.

Posted by Tom at 11:58 AM | Comments (0) |

PW hammered in Ohio accounting fraud case

In a highly unusual development, a federal magistrate in Ohio is recommending that a U.S. District Court approve a default judgment in an accounting fraud case against Big Four accounting firm PricewaterhouseCoopers for its alleged failure to turn over evidence sought by a former audit client and its shareholders.

Posted by Tom at 7:28 AM | Comments (0) |

Texas Pacific Group paddling upstream on Portland General Electric acquisition

This post from a couple of weeks ago noted this WSJ profile on Texas Pacific Group, the Fort Worth-based investment fund founded by former bankruptcy lawyer David Bonderman and business whiz Jim Coulter in 1993.

Well, it appears that TPG may be getting more than it bargained for in its proposed $2.35 billion cash and debt acquisition of Portland General Electric, which is Enron's Pacific Northwest utility, a deal that is still awaiting regulatory approval.

In the meantime, this Williamette Week Online article reports that TGP's proposed acquisition of Portland General is running into rough waters. Earlier this week, TPG released hundreds of pages of internal documents in response to the Williamette Week article as it tries to allay widespread skepticism among Oregonians about its intentions for the utility.

The documents lay out different scenarios that TPG is considering for for making the utility more profitable, including cuts in a customer-service department. TPG contends that the analysis was preliminary and is not going to be used as the basis of actual changes in utility operations. Despite the assurances, several Oregon officials are opposing TGP's acquisition of Portland General as the Oregon Public Utility Commission has begun final deliberations over regulatory approval.

TGP has proposed to put day-to-day control of the utility in the hands of a new Oregon company that would have a board comprised mainly of Oregonians. Nevertheless, TPG -- the 80% owner of the Oregon company -- would retain the right to overrule the Oregon company's board regarding key decisions. After Enron, Oregonians apparently do not trust anyone from Texas.

The main complaint of Oregonians that oppose the deal is that TPG's turnaround strategies could degrade utility service in Portland and surrounding communities. Oregon and Washington consumers already have been hammered by sharply higher electric rates as a result of rising natural-gas prices and continued fallout from the California energy crisis of 2000-2001.

Meanwhile, the economic bargaining continues. TPG has offered rate reductions totaling $43 million spread out over five years beginning in 2007 if the deal is approved. However, Commission staff and consumer advocates contend that the rate reductions are inadequate and are pushing for further concessions. To date, TPG is holding firm.

Posted by Tom at 6:54 AM | Comments (0) |

The honest idiot defense

In this article, NY Times business columnist Floyd Norris notes the common defense that the various indicted CEO's of the business world are using these days to defend themselves against criminal charges -- i.e., that the executive was "honestly ignorant" of the wrongdoing that was occurring at his company and that any false statements that he made were the unintentional result of his subordinates misleading him.

Or, as it is sometimes referred to in hard-knuckled legal circles, the "honest idiot defense."

The honest idiot defense does not attempt to deny that misconduct occurred. Rather, the defense focuses on avoiding liability by contending that the defendant's good faith ignorance prevents the government from establishing the requisite mens rea (intent) to convict the defendant of a crime. As you might expect, honest ignorance is not the easiest thing to get a jury to believe in defending a high-powered business executive.

Nevertheless, as this Wall Street Journal ($) article reports, the honest idiot defense is going to be front and center in the upcoming criminal trial of former Worldcom CEO, Bernard Ebbers. The Ebbers criminal case has many fascinating aspects, not the least of which is the yin-yang relationship between Mr. Ebbers and the government's chief accuser against him, former WorldCom CFO Scott Sullivan. But the most interesting aspect of the case surely will be the way in which Mr. Ebbers "good ol' boy" persona plays with the jury in the presentation of the honest idiot defense. And make no mistake about it, Mr. Ebbers will portray himself as the good-hearted dunce (he used his background as a gym teacher and motivator to apply high school basketball coaching techniques to management issues at WorldCom) in comparison to the sophisticated and well-educated Mr. Sullivan.

Another interesting aspect of the Ebbers criminal trial is that the government does not have the typical paper trail of fraud that it has used in most recent business fraud cases, notably the Arthur Andersen prosecution. Turns out that "country boy" Mr. Ebbers did not like computers and so he eschewed using e-mail to communicate with others at WorldCom. Moreover, iansmuch as Mr. Ebbers did not enjoy either reviewing or preparing written materials, he communicated orally with subordinates almost entirely. He did not even use voice-mail. Consequently, without the usual paper trail, the case may well come down to a swearing match between Messrs. Ebbers and Sullivan, which will also be impacted on how well Mr. Ebbers can present himself to the jury as a lovable dunce who the WorldCom sharpies manipulated.

Finally, it will be interesting to see if the Ebbers defense team raises the fact that Mr. Ebbers did not voluntarily sell much, if any, of his WorldCom stock after the bubble burst in the telecommunications industry in 1999. Ebbers' defense lawyers may reason with the jury that, if Mr. Ebbers really masterminded an elaborate fraud at WorldCom, then why did he not sell his WorldCom stock before the stock price collapsed? Rather than getting out rich (by way of comparison, Mr. Sullivan dumped almost $30 million of WorldCom stock in 2000), Mr. Ebbers went from being a billionaire to being so deeply in debt that personal bankruptcy appears inevitable. When the price of WorldCom stock began to plummet, margin calls forced Mr. Ebbers to sell one big slug of stock, but then he persuaded WorldCom's compliant board to stave off further margin calls by having WorldCom guarantee his loans that were secured with WorldCom stock. The financial result of those transactions is that the now insolvent Mr. Ebbers owes WorldCom more than $300 million, but savvy defense attorneys may be able to present the scenario to the jury as further evidence that Mr. Ebbers really thought that WorldCom would rebound and simply did not understand the dire financial condition.

Despite the obvious differences between the two men, that's why former Enron chairman and CEO Kenneth Lay and his attorneys will be watching the Ebbers criminal trial very closely.

Posted by Tom at 5:11 AM | Comments (0) |

January 11, 2005

Warren Buffett, meet Eliot Spitzer

General Re Corp., the wholly-owned insurance subsidiary of Warren Buffett's Berkshire Hathaway Inc., has been receiving some interesting mail lately.

Berkshire issued a press release on last week (see Form 8-K announcement here) disclosing that the insurer had received subpoenas from the SEC, New York AG ("Aspiring Governor") Eliot Spitzer, and a grand jury in the Eastern District of Virginia.

Expect Mr. Buffett to push for a global settlement quickly. Descriptions of broad and uncontrollable criminal investigations are a bit difficult for Mr. Buffett to explain in his his annual letter to Berkshire shareholders.

Besides, Mr. Spitzer could use Mr. Buffett's political support in his upcoming political campaigns. ;^)

Posted by Tom at 7:09 AM | Comments (0) |

Cuba's big oil find

This NY Times article provides a decent overview of the recent news that two Canadian energy companies had discovered an oilfield in the Gulf of Mexico under Cuba's control that has estimated reserves of 100 million barrels, albeit with the usual Times over-analysis regarding the business and political implications of the find.

Given that Cuba's business infrastructure and capital resources are utterly incapable of developing such a field, Castro will have to import those resources. Given his typical business instincts, a meaningful development deal will likely not get done anytime soon. Unlike the Times, I view Cuba's entry into exploration and production competition as a good thing. Unfortunately, Castro doesn't know how to compete, so the impact will likely be minimal.

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

The way government addresses California's chronic gasoline shortage

This previous post from last summer told the story about a bizarre Federal Trade Commission investigation that had been launched into the planned closing of an unprofitable Royal Dutch/Shell Group refinery in California.

Shell had been unable for years to find a sucker, er, I mean, a buyer for the Bakersfield facility. Shell had lost more than $50 million over the past three years on the refinery and was facing between $30 million and $50 million in turnaround and environmental costs on the old facility. However, given that the closure would crimp gasoline supplies further in California -- where supplies are already tight and prices the highest in the nation -- both the federal government and the California state government pressured Shell to find a buyer rather than close the facility. Not surprisingly, buyers were not exactly lining up to bid on an obsolescent refinery, so last month the federal government agreed to let Shell exceed pollution standards in operating the facility in return for Shell keeping it open for another three months to find a buyer.

Well, Shell announced yesterday that it had finally found a buyer for the facility -- Flying J Inc., a closely held Utah-based oil company that specializes in distributing diesal fuel to truckers. The purchase price was not announced publicly, but is estimated to be around $130 million by sources close to the deal.

So, let's take stock here. Shell lost $50-$75 million to sell an asset for $130 million -- not bad, but not the type of risk that Shell normally indulges to make a return on its investments. Rather than adopting policies necessary to induce major companies such as Shell to invest the capital necessary to build new refineries that would address the tight supplies in the Western part of the United States, the federal government and State of California took legal actions and then even compromised their sacrosanct environmental standards to prod Shell to sell an obsolescent facility to a tire kicker. Flying J is a good little company who will continue to operate the refinery, but it does not have the capital necessary to turnaround the declining production at the facility or build new refineries that are really needed to increase gasoline supplies. In the meantime, average gasoline prices in California have risen almost 27 cents a gallon to $1.93 from last year when the feds and the State of California started strong-arming Shell over its plans to sell the refinery.

My sense is that the postscript on this story is that the federal government and State of California's actions in this matter have, in the long run, made California's chronic gasoline supply problems worse. So it usually goes with governmental intervention into problems that markets should be resolving.

Posted by Tom at 5:08 AM | Comments (1) |

January 10, 2005

A worthy cause

Dr. Charles Katz is a good friend and one of Houston's finest otolaryngologists (i.e., ear, nose & throat doc).

Charles is also a marathoner and, over the past six years, he has raised over $40,000 in charitable donations for the Houston Food Bank in connection with running in the HP Houston Marathon. The Food Bank is the primary local charity that provides nutritious food to indigent families and individuals in the Houston metro area, and they perform this important charitable task effectively and efficiently.

Charles and 140 other Houston Food Bank sponsored runners are gearing up for this year's marathon, which will take place this coming Sunday, January 16. Please consider making a donation to the Food Bank on this nifty donation page in Charles' name or in the name of any of the other 140 Food Bank sponsored runners. It's a worthy cause.

Posted by Tom at 2:36 PM | Comments (2) |

Markets working on the NYSE

Following last week's news that the price of a New York Stock Exchange seat had fallen to $1 million (a 63% drop from the peak price in 1999), this NY Times article examines the market forces that have caused the lackluster interest in the Exchange's seats. As usual, the marketplace is the main reason, as it reacts to the NYSE's increasingly obsolescent business model that has traditionally eschewed automation:

On an average day, the New York Stock Exchange trades 1.5 billion shares worth about $50 billion. Unlike almost all its competitors, it has traders on the floor who execute customer orders as well as their own orders in an effort to get the best price. Now the exchange has to decide how to maintain that identity while allowing more trades to be executed electronically.

The NYSE's new business model is called the "hybrid market" model:

The . . . exchange's ability to employ the automated market, called the hybrid market (humans in an auction, and computers matching orders) will determine whether the Big Board will keep attracting orders. If it fails, market share could fall.

. . . [T]he hybrid market will serve the exchange's customers while maintaining the strengths of an auction market - namely the ability to get better prices rather than just deliver what appears on a computer screen. "The reason people come here is we have the best price 90 percent of the time and we have the best liquidity," [said John Thain, the CEO of the NYSE]. "The more liquidity you have the better able you are to offer the best price, the more you have the best price, the more often the order flow comes to you. You cannot have one without the other."

Nevertheless, the competition still expects the NYSE to continue losing market share, even under its new business model:

According to critics, more automation means that the New York Stock Exchange may lose its information advantage - the knowledge of what trades large players, such as mutual funds, are planning. Losing that knowledge could mean fewer orders. "There is a spiraling effect. As you lose the information, one customer takes his order off the floor, that translates to less information and less of an advantage," said Chris Concannon, executive vice president at the Nasdaq exchange. He said he believed that the S.E.C.'s new rules and a hybrid model would erode the Big Board's market share. "No single large electronic pool of liquidity will have more than 50 percent" of Big Board stock trading, he said.

And the NYSE's changing nature better happen fast:

Critics and supporters agree that the New York Stock Exchange is not blessed with time. "The New York Central Railroad saw itself as a national icon and it was obliterated," said Thomas Caldwell, chairman of Caldwell Asset Management and a buyer of four Big Board seats in the last year. "It ceased to exist. So many did. New York has to have a newer vision of itself and confidence in that vision."

Now, I ask you, isn't this a more effective and efficient way to change the NYSE than the method examined in this post and this post?

Posted by Tom at 5:29 AM | Comments (0) |

January 9, 2005

Beltran is gone

Carlos Beltran elected to reject the Stros' offer and sign elsewhere, probably with the Mets for $17 mil annually over seven years ($119 million).

As noted in this earlier post, this is really not a surprising result. Although it is a bit discouraging that the Stros put all their eggs in one basket in their pursuit of Beltran and came up with an empty basket, losing him is far from the disaster that many local media types will hype it to be.

As good as he is, Beltran is simply not worth $6 million more per season than J.D. Drew, another free agent outfielder on the market this off-season who signed with the Dodgers for $11 million per year over five years, even though Drew is more of an injury risk than Beltran. By focusing on Beltran and not considering other options, the Stros now find themselves in a position of having no centerfielder and really no good alternatives on the market. You will hear the mainstream media talk about Rice grad Jose Cruz, Jr. and the Mariners' Randy Winn as centerfielders who could be acquired in a trade, but neither of them is a long term answer. Although both are only three years or so older than Beltran, neither of them was able to post a runs created against average ("RCAA," explained here) statistic last season that was better than the 39 year old Bidg's.

You will also hear local media types talk about Jeremy Burnitz, but he is only marginally attractive. He is a 36 year old corner outfielder coming off a Coors Field-inflated season in which he generated an RCAA that was the same as Jeff Kent or Mike Lamb. Although that's above-average, the Stros already have such a player in the younger Jason Lane, who can also play centerfield. Finally, speedy Stros farmhand Willy Tavares has not yet proven in the minors that he can generate a good enough on base percentage or hit with enough power to play effectively at the Major League level, so don't expect him to be the answer.

An intriguing free agent possibility that remains on the market is Magglio Ordonez, a slugging 30 year old former White Sox corner outfielder who is a better hitter than Beltran. Unfortunately, the reason that Ordonez is still on the market is that he is an injury risk, as he is coming off knee surgery last season that led to the rare complication of bone marrow edema. A second surgery, performed in Austria, has reportedly cleared up the problem, but Ordonez was unable to return last season. So, he is a high injury risk and that has held down his value on the free agent market. The White Sox, Cubs and Orioles are reportedly the current bidders for his services. And oh, by the way, Ordonez is also represented by Beltran's uber-agent, Scott Boras.

If the Stros could get reasonably comfortable with Ordonez's rehabiliation from his surgery, then they could stick him in a corner outfield spot opposite of Berkman and place Lane in center as a adequate alternative until a purer centerfielder becomes available. Ordonez and Berkman whacking away at Minute Maid Park would not be a bad alternative to losing Beltran.

Finally, although I would not have objected to the Stros overpaying to keep Beltran, I think its fair to point out that it is rarely a good idea to overpay a player, even of Beltran's stature. And make no mistake about it, Beltran will be overvalued when he finalizes his deal with the Mets or whoever. While this past season was the best of Beltran's career and his batting line of .267(BA)/.367(OBA)/.548(SLG) was excellent, Beltran's RCAA of 46 was considerably less than Berkman's team-best 69 or J.D. Drew's 66. Similarly, Beltran's OPS (on base average + slugging percentage) of .915 tied him for 15th best in the National League, also well below Berkman's sixth best of 1.016 and not even as good as the more pedestrian Burnitz's OPS. Similarly, Beltran is one of the most gifted base stealers of all-time, but that's generally an overvalued skill and not all that important for the Stros as they incorporate speedsters Adam Everett, Chris Burke, and Lane into the lineup. Beltran did walk 92 times last season, but 10 of those were intentional, so there is still a question about his strike zone patience.

Thus, Beltran will likely be a great player for which ever team signs him, but he's still not Alex Rodriguez or Barry Bonds. The market has overvalued him and the Stros simply are not a rich enough team to overpay in the free agent market. With patience and wise use of their resources, the Stros can bounce back nicely from this disappointment. Signing Berkman and Roy Oswalt to long term deals, and persuading the Rocket to return, would be a nice start.

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

January 8, 2005

The Andrea Yates case

Dru Stevenson over at the South Texas Law Professor does a good job in this post of analyzing the current status of the Andrea Yates case. Professor Stevenson's thoughts are insightful, particularly his point about the trend in big cases of prosecutors abandoning the principle of prosecutorial discretion in favor of career advancement.

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

Phillies spammer sentenced

I'm glad the feds got this guy. Think what might have happened when the Eagles get beat in the NFL playoffs?

Posted by Tom at 2:34 PM | Comments (0) |

Frank E. Vandiver, RIP

Former Rice University and Texas A&M University history professor and president Frank E. Vandiver, who was one of A&M's most prominent professors over the past quarter century, died Friday in College Station at the age of 79.

During Vandiver?s tenure as president from 1981 to 1988, Texas A&M exploded in growth, reaching the the $100 million mark in research volume and becoming one of the nation?s largest enrollment universities. A&M's endowment also surpassed $1 billion during Mr. Vandiver's tenure. Prior to moving to A&M, Mr. Vandiver was acting president of Rice University in Houston from 1968-70.

Mr. Vandiver wrote and edited more than 20 books, including Mighty Stonewall, Their Tattered Flags: The Epic of the Confederacy and Black Jack: The Life and Times of John J. Pershing, the latter of which was a finalist for the National Book Award.

Mr. Vandiver is legendary in Texas history circles for publishing his first professional article at the age of 15 and earning his master's degree at the age of 19. Mr. Vandiver was the son of an academic, and his family lived next door to Albert Einstein for a time during Mr. Vandiver's youth while his father was a visiting professor at Princeton. In addition to Rice and A&M, Mr. Vandiver also taught history at Washington University in St. Louis, the U.S. Military Academy at West Point, and Oxford University in England.

After stepping down as president of A&M in 1988, Mr. Vandiver continued to teach at the university as a distinguished professor and holder of the John H. and Sara Lindsey Chair in Liberal Arts. Mr. Vandiver also served as the director of the Mosher Institute for International Policy Studies, which is an A&M think tank.

Mr. Vandiver is survived by his wife, Renee, three children and six grandchildren, and was preceded in death by his first wife, Susie. Funeral services for Vandiver are pending with Hillier Funeral Home in Bryan.

Posted by Tom at 7:16 AM | Comments (1) |

Ken Lay promotes his website

The Houston Chronicle's main Enron reporter -- Mary Flood -- weighs in today with this piece on how former Enron chairman and CEO Kenneth Lay is using sponsored links to direct websurfers to his website. Sponsored links appear prominently in searches for a word or name in an Internet search engine. They serve the dual purpose of making websites more noticeable and being a revenue source for search engines.

What are the chances that any prospective juror at Mr. Lay's criminal trial who admits to reading Mr. Lay's website will make in on the jury? Slim and none, in my view.

Posted by Tom at 6:39 AM | Comments (0) |

Enron outside directors settlement

On the heels of this post earlier this week about the impending outside directors' settlement in the WorldCom case, this NY Times article reports on the impending $168 million settlement involving the class action securities fraud and related claims against eighteen former directors on Enron Corp.'s Board of Directors. Most of the settling directors were outside directors of Enron.

This settlement has actually been in the works for several months as the class action plaintiffs' lawyers became concerned that the extraordinary defense costs of Enron's former officers and directors would soon exhaust the insurance proceeds available to fund a settlement under Enron's officers & directors' liability insurance policies.

Consequently, in October, the plaintiffs reached a tentative settlement with the Enron board members that provided for payment of the remaining insurance proceeds ($200 million) under the O&D policies despite the fact that such a result would leave dozens of former Enron officers and directors not included in the settlement without insurance coverage for their defense costs. In addition, certain settling directors agreed to pay an additional total of $13 million out of their own pockets, which was essentially 10% of each such director's net gain from their Enron stock sales during the class period. The D&O liability insurers agreed to contribute $155 million toward the settlement, which exhausted the insurance coverage for the non-settling directors and officers.

With that agreement in principle in hand, Enron's outside directors in late October obtained an injunction against Enron's O&D liability insurers from the U.S. District Court in Houston that enjoined the insurers from using any further policy proceeds to pay defense costs of former Enron officers and directors pending the District Court's consideration of the proposed settlement. Since that time, the plaintiffs, the outside directors, and non-settling former Enron officers and directors such as Kenneth Lay and Jeffrey Skilling have cut a deal in which $13 million of the insurance proceeds will be set aside for their future defense costs in return for the non-settling officers and directors' consent to the outside directors' settlement. The class action plaintiffs will get $155 million of the remaining insurance proceeds under the settlement and $32 million of the proceeds has been earmarked in the settlement for the Enron bankruptcy estate. The settlement does not include many former Enron officers, including all former Enron officers who have either pleaded guilty to criminal charges or who are currently facing criminal charges.

The outside directors settlement is the fourth major settlement in the class action lawsuit that was commenced against Enron's former officers, directors, and financial institutions nearly three years ago on the heels of Enron's hyper-publicized accounting scandal. Including the latest settlement, the class action has generated just under $500 million, which is really rather paltry compared to the over $30 billion in damages that the plaintiffs have alleged in the class action.

Indeed, contrary to the generally laudatory press accounts relating to this and other settlements in cases such as Enron and WorldCom, the handling of the Enron class action by the plaintiffs' lead lawyers -- Lerach Coughlin Stoia Geller Rudman & Robbins LLP -- has been subject to sharp criticism among professionals close to the case. The genesis of that criticism was the plaintiffs' lawyers alleged involvement in allowing a proposed $750 million settlement with Arthur Andersen slip away in early 2002 during the early stages while Anderson was still a going concern operation. In addition to the substantial settlement payment, that proposed settlement would have involved a resolution of the criminal charges against Andersen in a manner that would have allowed Andersen to continue in business as a major accounting firm, saving thousands of jobs in the process. When the proposed deal allegedly blew up in a dispute between the plaintiffs' lawyers and the financial institution defendants, Andersen's criminal trial went forward, resulting in the felony conviction of Andersen that prompted Andersen's demise as an accounting firm. Andersen remains a defendant in the Enron class action, but it is a virtual shell that no longer has the resources necessary to pay $750 million in either damages or a settlement in the Enron class action. Consequently, the plaintiff's lawyers appear to have left a considerable amount on the table, and have not made up for it yet.

Nevertheless, the plaintiffs in the class action are still seeking billions in damages from a large group of financial institutions for allegedly assisting Enron in defrauding shareholders and creditors. The financial institutions include J.P. Morgan Chase & Co., Citigroup Inc., Merrill Lynch & Co., and Credit Suisse First Boston, to name just a few.

The Enron directors paying the total of $13 million out of their pockets are Robert Belfer, Norman Blake, Ronnie Chan, John Duncan, Joe Foy, Wendy Gramm, Robert Jaedicke, Charles LeMaistre, Rebecca Mark-Jubasche and Ken Harrison. The other directors covered by the settlement who are not required to pony up any money out their own pockets are Paulo Ferraz-Pererira, John Mendelsohn, Jerome Meyer, Frank Savage, John Urquhart, John Wakeham, Charles Walker and Herbert Winokur. As is typical in such deals, none of the directors are admitting any wrongdoing as part of the settlement, which still requires final court approval.

Posted by Tom at 5:16 AM | Comments (0) |

January 7, 2005

SCOTUS grants cert in Arthur Andersen appeal

The U.S. Supreme Court granted certiorari on Friday on Arthur Andersen's appeal of its conviction of felony criminal charges in connection with allegedly destroying and altering Enron Corp.-related documents.

The Supreme Court will review this Fifth Circuit Court of Appeals ruling that upheld the former Big Five accounting firm's June 2002 conviction by a jury in a Houston federal court. The key issue in the case will be whether the jury instructions that U.S. District Judge Melinda Harmon approved during the trial were too vague and broad for jurors to determine whether Andersen's actions constituted obstruction of justice. The specific issue to be addressed is this: "Must Arthur Andersen's conviction for witness tampering under 18 U.S.C. 1512(b) be reversed because the jury instructions misinterpreted the 'corrupt persuasion' and 'official proceeding' elements of the offense?"

The Justice Departent charged Andersen with obstruction of justice for its mass destruction of Enron-related documents in late 2001 as the Securities and Exchange Commission and Congressional Committees began investigating Enron's complicated financial structure. As we all know, Enron catapulted into bankruptcy in early December 2001 amid revelations of accounting schemes to mask debt and inflate profits.

As Enron's auditor, Andersen contended that it was only implementing its document-retention policy that called for destroying unneeded documentation to streamline files. Andersen argued during trial that employees who shredded thousands of documents simply followed the policy and had no intent to undermine any investigation of Enron.

Although an Andersen victory at the Supreme Court would be a Pyrrhic victory for the now defunct firm, this is a positive development for the Enron case in general. The Justice Department's heavy-handed prosecution of Andersen reflected an egregious lack of prosecutorial discretion -- the prosecution of Andersen ultimately caused the loss of thousands of jobs, most of which never had anything to do with Enron. Moreover, as noted here awhile back, the accounting industry has still not recovered from the Andersen fallout, and big business is finding it difficult to find enough auditors to fulfill the new Enron-era regulatory obligations.

Thus, a Supreme Court reversal will not help Andersen much, but it just might send the right message to a Justice Department that increasingly appears oblivious to the negative economic impact that results from criminalizing merely questionable business practices.

Posted by Tom at 7:22 PM | Comments (3) |

Attempting to cure the PBGC blues

This earlier post noted the growing concern in the business community that the Pension Benefit Guaranty Corporation -- the quasi-governmental insurer of private company pensions -- is facing a string of large company bankruptcies and pension defaults that could lead to another multibillion-dollar taxpayer bailout similar to the Savings and Loan bailout of the late 1980's.

Now it appears that the growing private pension problem is being noticed at the highest levels of government. This article from today's NY Times reports that officials in the Bush administration are close to unveiling a rescue plan for the PBGC.

The PBGC is a government-owned insurance company that Congress created in 1974 after a string of corporate bankruptcies left retirees without pensions. The PBGC's mission is to provide a limited guarantee of private defined-pension plans, which are pensions that provide retired workers with a set amount each month based on wages and years worked. If a pension plan terminates without adequate resources to meet its obligations to its retired workers, then the PBGC guarantees up to $45,614 annually for employees who retire at age 65.

To finance its activities, the PBGC collects annual premiums from employers with defined-benefit plans that are required to participate in the program. Last year, the premiums totaled about a billion dollars. The PGBC also receives funds from terminated pension plans that it is forced to take over.

With five U.S. airlines already wallowing in bankruptcy court, the PGBC is under an incredible load of financial pressure. Yesterday, the US Airways Group, Inc. bankruptcy court approved the turnover of three employee pension plans to the PBGC at a cost of a cool $2.3 billion. Likewise, last week, the PBGC took over the UAL Corp. (the parent of United Airlines) pilots' pension plan in UAL's pending chapter 11 case. The takeover is likely to cost the PBGC at least another $1.25 billion. With these kinds of growing liabilities, a taxpayer-funded bailout of the agency is inevitable unless an overhaul of the pension-insurance system is approved quickly.

The Bush administration will probably propose to prop up the pension guaranty fund with increased premiums for all participating companies, including higher fees for businesses that are on the brink of bankruptcy. However, that latter proposal shows how misguided this type of "reform" can be. Charging higher premiums to companies that are already at heightened risk of bankruptcy will actually make it harder for the companies to avoid bankruptcy. Thus, that proposal could well place PGBC fund at higher risk rather than making it more secure.

Moreover, passing any reform through Congress will not be a cakewalk. Business groups and labor unions -- recognizing that a federal bailout is likely under the currently broken system -- are already raising concerns about how far the changes should go. Employee groups and unions contend that imposing higher premiums or stiffer rules could prompt some companies to freeze or eliminate the lucrative but uneconomic current pension plans. Labor unions simply prefer an immediate government bailout, as they see the writing on the wall. Last year, the PGBC had a deficit of $23.3 billion, which was double the prior year's decifit. So, we are clearly dealing with an agency here that is is bleeding badly.

And the projections are not rosy, either. The Center on Federal Financial Institutions (a Washington think tank) estimates that the PBGC will run out of cash and rack up a $78 billion deficit within the next 16 years.

As with Social Security, there will be political voices who contend that the PGBC's current problems are not all that bad and that the reforms are just part of the Bush Administration's pro-business and anti-labor bias. However, you can take this to the bank -- the first loss on a problem such as this is the least expensive one. If we put off dealing with the problem, the cost of the bailout will increase substantially.

Posted by Tom at 6:18 AM | Comments (0) |

Hammering the Hammer

Earlier this week, House Republicans reversed course and rejected dubious Ethics rules changes that were proposed late last year that would have allowed members indicted by state grand juries to remain in a leadership post. Earlier posts on the rules changes are here and here.

The rule changes were transparently proposed to benefit Houston congressman and House Majority "Leader" Tom DeLay in the event a Travis County grand jury indicts him in connection with an investigation of campaign financing that has already resulted in the indictment of three of his political political associates.

In today's Washington Post, David Ignatius provides this interesting profile of the Colorado representative -- Joel Hefley -- who decided to take on Mr. DeLay over the change in the ethics rule and, in so doing, pulled out an unlikely victory for Congressional ethics. Read the entire informative piece, which concludes with an astute observation about Mr. Hefley and Congress:

He will pay the price, but he doesn't seem to mind. He knows he did the right thing. May his number increase.

Posted by Tom at 5:26 AM | Comments (0) |

January 6, 2005

John O'Neill's firm merges with Howrey Simon

Washington, D.C. based Howrey Simon Arnold & White LLP announced yesterday that seven partners from the Houston-based litigation boutique of Clements, O'Neill, Pierce, Wilson & Fulkerson LLP -- including Swift Boat veteran John O'Neill -- have joined Howrey Simon's Houston office.

The move was Howrey Simon's second major move in Houston over the past several years. In 2000, Howrey Simon merged with Houston-based Arnold White & Durkee, which was Houston's most prominent IP firm at the time. Howrey Simon Arnold & White is now a big international firm with about 550 attorneys in its 10 offices in the U.S. and Europe.

In addition to Mr. O'Neill, the other partners from Clements, O'Neill that will join Howrey are managing partner Jack O'Neill (no relation to John), Jesse R. Pierce, Sashe D. Dimitroff, Kelly J. Kirkland, Reagan D. Pratt and Mark A. White. Eight associates and 10 other attorneys will also make the move to Howrey Simon.

Posted by Tom at 3:30 PM | Comments (0) |

Thoughts on USC's National Championship

Don't miss USC Professor Peter Gordon's thoughts on the effects of his university's national championship football team.

Posted by Tom at 7:53 AM | Comments (0) |

WorldCom outside directors settlement

10 of the 12 former outside directors of WorldCom Inc. have agreed in principle to pay $18 million out of their own pockets as a part of a $54 million settlement of the class-action lawsuit that WorldCom bondholders and shareholders brought against them in connection with the telecommunications company's massive accounting scandal and resulting chapter 11 bankruptcy case. Paul Curnin of Simpson Thacher & Bartlett LLP in New York represents the ten former directors.

The directors' liability insurers will pay the remaining $36 million of the tentative settlement. The $18 million that the former directors will pony up under the settlement represents about 20% of their combined personal net worth, excluding exempt property such as primary residences and retirement accounts.

WorldCom emerged from Chapter 11 bankruptcy protection last year and has changed its name to MCI. The reorganized company has an entirely different board of directors.

The tentative settlement is being watched closely be the business and legal community because it is precedent for expansion of the potential liability of outside directors whose companies commit accounting fraud. By way of comparison, the outside directors of Enron are currently attempting to settle similar litigation by using the remainder of approximately $200 million of the Enron officers and directors' liability insurance while paying only 10% of their net Enron stock sales during the class period out of their own pockets.

As a general proposition, outside corporate directors have been among the most difficult defendants to tag in securities and accounting fraud litigation because of their lack of involvement in a company's management and accounting processes. Although outside directors can face liability in such cases for oversight failures if their dereliction of duty is proven to both severe and demonstrable, the cases that have successfully proven such conduct are extremely rare. As a result, most cases against outside directors are settled by the directors' liability insurer without the outside directors paying any portion of the settlement amount themselves.

The planned settlement comes about several months after Citigroup Inc.'s $2.65 billion settlement in the same lawsuit. Citibank -- one of WorldCom's leading bond underwriters -- was one of 18 underwriters in the case, which also includes J.P. Morgan Chase & Co., Deutsche Bank AG and Bank of America Corp.

Update: Professor Ribstein provides his typically insightful analysis of the settlement here, and offers the following astute observation:

Well, the audit committee was independent, and at least one member did have the requisite expertise, but according to the complaint that didn?t prevent them from completely falling down on the job. Moreover, the complaint details disturbing governance failings at all levels ? executives, underwriters, accountants.

I believe an important lesson from all this is that our current model of corporate governance just isn?t working, and that we delude ourselves if we think that Sarbanes-Oxley is going to fix it.

So what?s the answer? First, we need high-powered market-based incentives that would be provided by the return of an active market for corporate control. Second, as I?ve been saying (e.g., here) we need to encourage alternative business structures that take near-absolute power over corporate earnings away from corporate executives and give it to the firm?s owners.

In other words, cases like WorldCom tell us that the answer to the corporate governance problems lies in getting rid of the corporation as the exclusive structure for business enterprise.

Posted by Tom at 5:41 AM | Comments (0) |

Markets finally working in the airline industry

Dallas-based Southwest Airlines Co. announced Wednesday that start service to Pittsburgh International Airport in May.

Southwest's move comes on the heels of US Airways Group's disastrous performance over the holiday season and the troubled airline's service cuts at the airport. US Airways has gradually cut about half of its flights from Pittsburgh since the September 11, 2001 attacks on New York and Washington.

This is Southwest's second move to compete directly with US Airways in Pennsylvania over the past year. In early 2004, Southwest entered the Philadelphia market that US Airways used to dominate, a move that has already increased traffic and lowered fares there. Southwest's venture into Pittsburgh continues its countercyclical growth, which is reflected by its 10% capacity increase over the past year while most of the other airlines have been reeling.

By continuing to execute its tried and true low-cost business plan, Southwest has been able to remain profitable during the airline industry's troubled period since the Sept. 11, 2001 attacks, and its strong liquidity position is unparalleled in the airline industry.

Posted by Tom at 5:09 AM | Comments (0) |

January 5, 2005

The Putin Puzzle

The Wall Street Journal's ($) Holman Jenkins, Jr. finally weighs in on the Russian government's heavy-handed takeover of OAO Yukos, and he correctly notes that the Yukos case signifies the end of any hope that Russian president Vladimir Putin will lead the country toward a European-style social democracy with an economy based on at least reasonably free markets:

Foreign investors puzzle over Mr. Putin and his seeming ineptitude at making Russia into Thailand writ large, a gracious and dutiful partner for trade and finance. But perhaps Mr. Putin never really had "reform" in mind. Western imaginations didn't quite grasp that Saddam Hussein fancied himself a conqueror, an empire builder, a man of destiny (and was content to limit his country's economic potential to the oil under his direct control). Western leaders and investors may be suffering from a similar myopia when it comes to Mr. Putin.

Mr. Jenkins goes on to point out that, despite Mr. Putin's tactics, Western investors continue to line up to invest in various Russian business ventures. That's true, but my sense is that it is a relative trickle in comparison to what the West would be willing to invest in Russia but for the Russian government's takeover tactics. Until that changes, Russian economic development will continue to lag far behind the West.

Along similar lines, Boston Globe columnist Cathy Young -- author of Growing Up in Moscow: Memories of a Soviet Girlhood (Ticknor & Field, 1989)-- provides this Reason Online article on Mr. Putin and the implications of his grip on the Russian government for the West.

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

The WSJ on the case against Ken Lay

This John R. Emshwiller and Rebecca Smith Wall Street Journal ($) article provides an overview of the Justice Department's criminal case against former Enron chairman and CEO, Ken Lay.

Mr. Emshwiller and Ms. Smith have been covering the Enron scandal from the beginning and have written a book on the subject -- 24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America (HarperBusiness 2003) -- that certainly would prompt one to question their objectivity in writing about the issues covered in the article. As noted several times in this blog, the best book on the Enron affair to date has been the one written by Fortune reporters Bethany McLean and Peter Elkind, Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio 2003). So, if you want to read just one book on the Enron scandal, read the latter.

Nevertheless, Mr. Emshwiller and Ms. Smith at least acknowledge in the article that the government's case against Mr. Lay is difficult because it largely relies on public statements that he made in support of Enron as the company was spiraling downward during the latter stages of 2001. What you will not find in the article is any meaningful analysis of the policy implications of the government prosecuting a businessman for the "crime" of making public statements about a troubled company that were clearly intended to try and save the company for the benefit of its shareholders and employees. Apparently, the government prefers that Mr. Lay not have said anything and ensured that Enron went down in flames?

This previous blog post provides a more objective analysis of the policy implications of the government's case against Mr. Lay. The demise of Enron effectively marked the end of a speculative stock market bubble that was the result of many bad decisions by businesspersons and investors alike. There was even criminal behavior involved in some instances. However, to paint the entire management team involved in a business failure such as Enron as criminals is akin to using a sledgehammer where surgical precision is needed. The results of such an approach are hopelessly arbitrary and capricious, as we have already seen with cases such as those involving Jamie Olis , Sheila Kahanek, and Global Crossing, Ltd. Indeed, such questionable prosecutions are how someone such as Mr. Olis ends up serving a longer prison sentence than a true business criminal such as Martin Frankel.

Mr. Emshwiller and Ms. Smith do not have much interest in exploring this angle of the Enron case. That's a shame, because it may just be the most important policy issue arising from the scandal.

Posted by Tom at 5:51 AM | Comments (0) |

USC, National Champs

USC 55 Oklahoma 19

In another bowl game that was not as close as the final score indicates, the USC Trojans absolutely laid the wood to the Oklahoma Sooners in the BCS National Championship Orange Bowl game on Tuesday night.

In this previous post on November 7, I noted that OU's defensive secondary was probably not good enough to beat USC, and that certainly turned out to be the case as USC QB Matt Leinart (18-35 for 332 yds; 5 TD's; 0 Int) sliced and diced the OU secondary as if he was preparing a salad.

Meanwhile, OU's offense could never find a rhythm against the speedy USC defense. OU QB Jason White (24-36 for 224 yds; 2 TD's; 3 Int) finished a marvelous college career by throwing three interceptions and looking generally overwhelmed the entire game.

White's first interception -- the result of a brain fart decision of throwing into triple coverage while under pressure -- was arguably the turning point in the game. It came at the end of the first quarter as OU appeared poised to tie the game at 14, and USC promptly took the ball and drove for a quick TD and a 21-7 lead. After an OU receiver slipped and White threw another interception on the next possession, the Trojans quickly scored another TD and the game was effectively over.

USC is now 34-3 over the past three seasons with one and a half National Championships and two Heisman Trophy winners. They are now indisputably the best program in college football at this time.

Posted by Tom at 5:09 AM | Comments (6) |

January 4, 2005

Krispy Kreme moves closer to the brink

Krispy Kreme Doughnuts Inc. continued its slide toward chapter 11 as the company announced today that it plans to restate its results for fiscal 2004, that its failure to file financial reports will put it in default on its credit facility by mid-January, and that it has guaranteed payment of money borrowed by franchisees who are also in default of their debt agreements. Here are earlier posts that chronicle Krispy Kreme's mounting financial problems.

The company said the restatement in earnings would would reduce net income for 2004 by between $3.8 million and $4.9 million, or 6.6% to 8.6%. The restatement is primarily due to improper accounting of the company's acquisition of its Michigan franchisee, which is a problem that the company had previously acknowledged. Krispy Kreme has borrowed about $91 million under its credit facility, and does not currently have the capacity to borrow any more.

The trendy doughnut retailer has been hammered over the past year by a lethal combination of slowing sales growth, multiple investigations of its accounting and corporate governance practices (including investigations by the Securities and Exchange Commission and a special committee of the Krispy Kreme board), and mounting litigation pressure from various shareholder lawsuits. Today's news knocked the company's share price dow 10%, to $11.03 in midmorning trading on the New York Stock Exchange. Krispy Kreme's stock price topped out at $49.74 during the summer of 2003.

Particularly troubling for creditors was the company's announcement that about 30% of the $52 million of franchisee debt that the company has guaranteed is held by franchisees who are in default under their debt agreements. Although the company asserts that it has adequate liquidity on hand to pay for current operations, that cash will not be sufficient to pay any meaningful portion of that guaranteed franchisee debt anytime in the near future.

Compounding the company's problems is an allegation that was made in one of the multiple shareholder lawsuits that has been filed against the company recently. The plaintiffs in that lawsuit -- citing confidential former Krispy Kreme employees -- contend that the company routinely padded its sales numbers by doubling doughnut shipments to wholesale customers at the end of each fiscal quarter.

It does not look like this is going to end well for Krispy Kreme's current shareholders. Do you think Krispy Kreme will supply the doughnuts at its First Meeting of Creditors? Stay tuned.

Posted by Tom at 12:46 PM | Comments (2) |

North Texas innovators

Check out this interesting Cheryl Hall article in the Dallas Morning News that profiles 36 North Texas innovators who have changed the way we live. It's not your typical place that can produce both the researchers who discovered statin drugs and the fellow who invented the first frozen margarita machine. Hat tip to Virginia Postrel for the pointer.

Posted by Tom at 7:29 AM | Comments (0) |

Posner on planning for unlikely catastrophes

Seventh Circuit Court of Appeals Judge, law professor, economics and law guru, and author Richard Posner has written -- in light of the recent Indian Ocean Tsunami disaster -- a timely new book, Catastrophe: Risk and Response (Oxford, Oct. 1, 2004), in which he argues that governmental planning for even unlikely disasters makes economic sense. Peter Singer reviews Judge Posner's new book here.

Judge Posner summarizes his argument in that regard in this Wall Street Journal ($) op-ed, and makes the following point that should give pause to those who advocate further cuts in NASA's budget:

An even more dramatic example [of lack of planning for unlikely disasters] concerns the asteroid menace, which is analytically similar to the menace of tsunamis. NASA, with an annual budget of more than $10 billion, spends only $4 million a year on mapping dangerously close large asteroids, and at that rate may not complete the task for another decade, even though such mapping is the key to an asteroid defense because it may give us years of warning. Deflecting an asteroid from its orbit when it is still millions of miles from the earth is a feasible undertaking. In both cases, slight risks of terrible disasters are largely ignored essentially for political reasons.

In part because tsunamis are one of the risks of an asteroid collision, the Indian Ocean disaster has stimulated new interest in asteroid defense. This is welcome. The fact that a disaster of a particular type has not occurred recently or even within human memory (or even ever) is a bad reason to ignore it. The risk may be slight, but if the consequences, should it materialize, are great enough, the expected cost of disaster may be sufficient to warrant defensive measures.

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

Halliburton's chapter 11 strategy

Houston-based Halliburton Co. announced on Monday that it had consummated an innovative $5.1 billion settlement with asbestos claimants.

Halliburton became exposed to about 400,000 asbestos claims through its acquisition of Dresser Industries Inc. in 1998, which was a deal that former Halliburton CEO and current U.S. Vice President Dick Cheney promoted. The claims were asserted against a former Dresser subsidiary, Harbison-Walker Refractories.

The settlement allows two large units of Halliburton to emerge from chapter 11 cases and opens the door for Halliburton to sell its Kellogg Brown & Root ("KBR") construction and government-contracting unit. The KBR has been the subject of considerable scrutiny this past year over the unit's handling of a $10 billion contract to provide support services for the military in Iraq.

As with many companies, the liabilty represented by the asbestos claims has been a huge monkey on Halliburton's back -- Halliburton has booked more than $3 billion in asbestos-related charges since 2002. The settlement allows Halliburton to take advantage of the current favorable market for the oil field services industry that is based on strong demand for such services from exploration and production companies. In anticipation of the settlement, Halliburton's share price has surged by about 25% over the past quarter, closing yesterday at $38.02.

Under its innovative chapter 11 strategy, Halliburton effectively used its profitable oil field service business to support the company's operations while it promoted a settlement plan that liquidated the amount that Halliburton would have to pay current and future asbestos claimants. Although other companies have used chapter 11 as part of an overall litigation strategy against asbestos claimants, Halliburton's strategy to dedicate 59.5 million company shares and $2.8 billion in cash to create a $5.1 billion trust fund to pay current and future asbestos claimants faciliated the settlement while most other companies remain locked in settlement negotiations with lawyers for asbestos claimants.

The case has been closely watched as most other companies have elected to try and resolve their unliquidated liability for asbestos claims through the unwieldly and inconsistent civil justice system. More than 70 companies -- including large companies such as ABB Ltd., W.R. Grace & Co., Federal-Mogul Corp. and Owens Corning -- have filed chapter 11 cases for themselves or a business unit because of huge asbestos claims, but many of those companies continue to fight with the asbestos claimants and have failed to liquidate the amount that the companies will ultimately have to pay current and future claimants. Many of those companies are actively lobbying for federal tort-reform legislation that would limit mass tort lawsuits and create a universal fund to pay asbestos claims.

Posted by Tom at 5:16 AM | Comments (0) |

January 3, 2005

Updating the Yukos case -- What is going on with Yugansk?

After announcing late last week that Yuganskneftegaz ("Yugansk") -- OAO Yukos' former primary production unit -- would not be transferred to state-controlled OAO Gazprom as anticipated, the Russian government announced over the weekend that Yugansk is now operating as a subsidiary of OAO Rosneft, the Russian government's oil company that is currently merging with Gazprom.

This latest news confirmed that nobody in the West really has a clue of what the Kremlin has planned for Yugansk.

In the meantime, the China National Petroleum Corp. told the Wall Street Journal ($) that they were not aware of the Kremlin's offer of a stake in Yugansk reported in this previous post. The Journal article speculates that the Kremlin-China talks regarding Yugansk are taking place at the highest levels of the two governments and that the details simply have not been delegated to the operators of the state-controlled oil companies yet.

The Russian government previously forced the sale of Yugansk last month to defray the government's alleged back-tax claims against Yukos that total $28 billion. After a Houston Bankruptcy Court issued a TRO in Yukos' chapter 11 case enjoining any Western financial institutions from participating in the auction, a shell bidder emerged at the auction to buy Yugansk for $9.4 billion. Rosneft subsequently agreed to buy the shell bidder for an undisclosed amount. A hearing is scheduled in the Houston Bankruptcy Court this Thursday on Gazprom's motion to dismiss the Yukos' chapter 11 case. Here are the previous posts on the Yukos' chapter 11 case and related matters.

Finally, as if the Russian government's handling of Yukos was not enough of a deterrent to Western investment in Russian business interests, this Wall Street Journal ($) article notes that the measures taken by prosecutors and the Russian courts have exacerbated the vulnerability of defense lawyers who represent interests competing with those of the Russian government in the notoriously political Russian judicial system. As the Journal article observes:

In recent months, the arrests and interrogations of Yukos lawyers have fueled fears that those who defend politically unpopular clients could themselves become targets. Two senior Yukos legal officers fled Russia this fall to escape criminal prosecution, while a lower-ranking colleague who stayed, Svetlana Bakhmina, was arrested last month. Another Yukos legal consultant, Elena Agranovskaya, was detained a day later. Prosecutors also have launched sweeping searches and interrogations of other Yukos lawyers and middle managers.

Along these same lines, note this Boston Globe article on the fear and self-censorship that is occurring under the Putin regime in Russia. One of the emerging business issues of 2005 is the degree to which the above-described Russian government actions will chill badly needed Western investment in Russian business interests?

Posted by Tom at 7:54 AM | Comments (0) |

January 2, 2005

2004 Weekly local football review

Browns 22 Texans 14

In an effort to compete with the Aggies for the most uninspired effort of the holiday season, the Texans laid an egg against the hapless Browns in the final game of the 2004 season. The loss prevented the Texans from achieving an 8-8 record in their third NFL season and left a sour aftertaste to a season of undeniable progress for the Texans.

The main flaws in the Texans' squad were on full display in this one. The Browns' pass rush manhandled the Texans' offensive line, so Texans QB David Carr (15-25 for 114 yards; 1 TD; 0 Int) was running for his life most of the day. Moreover, inasmuch as Carr has below average recognition skills, the Texans could not combat the Browns' fierce pass rush with short drops and passes to hot receivers. Consequently, the Texans' passing game was rendered utterly ineffective in this game, averaging a full yard less per play than the Texans' rushing attack.

Frankly, the Texans' problems in the offensive line are not surprising given that the Texans' management has made some particularly bad choices in this personnel area. The Tony Boselli deal was a bust, and then the Texans wasted a high draft choice in their second draft on tight end Bennie Joppru, who has not played a down for the Texans.

Partly as a result of these questionable decisions, the Texans are playing Seth Wand -- an inexperienced second year player from a small college program -- at the key left offensive tackle position. Although the Texans have veteran offensive linemen Steve McKinney (7 yrs), Todd Wade (5 yrs), and Zack Wiegert (10 yrs) playing regularly, a football team is only as strong as its weakest links in this area. And the Texans' key offensive line draft picks -- Wand, Chester Pitts and Fred Weary -- have been weak links to date.

If the Texans had a top flight QB, at least some of the problems in the offensive line would probably not be so apparent. However, through three seasons now, Carr has established that he is only an average NFL QB at best. Carr is not a bust such as Tim Couch or Ryan Leaf, but he is simply not good enough to overcome the current limitations in the Texans' offensive line.

Interestingly, the rest of the Texans' personnel areas are in reasonably good shape. Oh, they could use a dominant defensive lineman (couldn't every team?) along the lines of the Oilers' Curly Culp from a generation ago. Similarly, another big wide receiver to take pressure off of the talented but underutilized Andre Johnson would also be helpful. But none of these other holes are as big as the ones on the offensive line. So, assuming that the Texans' management can plug those, the Texans appear to be on track to be a playoff contender by their fifth season in the NFL.

By the way, I know that the Texans' loss to the Browns was bad, but is that really a reason for this, particularly after this a couple of weeks ago?

Giants 28 Cowboys 24

In an absolutely appropriate ending to a miserable season, the Cowboys snatched defeat from the jaws of victory as they scored with 1:49 to play to take a 24-21 lead, and then allowed the Giants to march down the field and score the winning TD with 11 seconds left. The rebuilding job at Dallas looks to be so extensive at this point that I cannot see the Big Tuna lasting much longer as coach of the Pokes. Good thing that vote on the new stadium occurred in early November rather than early January.

Texas Longhorns 38 Michigan 37

In a hugely entertaining Rose Bowl game, the Horns' Vince Young put on a show for the ages as UT kicker Dusty Mangum's 38 yard field goal as the clock expired won it for Texas. The win was the first for Texas in a BCS Bowl game, and at least loosened the hold of that big monkey on UT Coach Mack Brown's back that was mentioned in this previous post.

Michigan's offense performed admirably against the Horns' quick defense, efficiently using their 355 yards of total offense to score 37 points. Freshman Michigan QB Chad Henne (18-34 for 227 yds, 0 int) was very good, throwing four TD passes, including three to All-World WR Braylon Edwards.

Nevertheless, the Michigan defense simply could not contain Young, who glided like a gazelle through and around the Michigan defenders while scoring 4 TD's, rushing for almost 200 yards, and generating just under 400 of Texas' 444 yards of total offense. Young is simply the type of rare athlete who looks like he could dominate a basketball game or a track meet just as readily as a football game.

By the way, the videotape of this game is almost certainly destined to become one of the most effective tools in coaching circles for teaching how not to cover kickoffs. Between Michigan's Steve Breaston and Texas' Ramonce Taylor, the teams combined for over 420 yards on kickoff returns, averaging a remarkable 32.5 yards per return. Texas' kickoff coverage was so bad that, by the fourth quarter, I was urging Coach Brown to direct his kicker simply to kick the ball out of bounds on kickoffs so that Michigan would be "backed up" to its 35 to start their next drive.

Also, the Iowa-LSU Capital One Citrus Bowl game that was on ABC immediately before the Rose Bowl game had an even more incredible ending as Iowa QB Drew Tate (from Baytown, just east of Houston on I-10) threw a 55 yard TD pass as time expired to pull it out for the Hawkeyes. Between that game and the Rose Bowl, ABC had an incredibly engaging eight hours of college football on this New Year's Day.

Tennessee 38 Texas Aggies 7

In a game that was not as close as the final score indicates, the Volunteers had a 21-0 lead over the hapless Aggies with over 13 minutes to go in the second quarter of the 2005 Cotton Bowl. As with the Texans' loss to the Browns, this was a disappointing ending to a season of decided overall progress for the Aggies.

Although the Aggies performed surprisingly well this season while playing one of the nation's most difficult schedules, the last two games against Texas and Tennessee exposed the Aggies' weakness vividly. Both Texas and Tennessee's defenses were quick and strong enough to shut down A&M's rushing attack while bringing pressure on A&M QB Reggie McNeal in a manner that kept him in the pocket while passing. Without an effective rushing attack and McNeal's scrambling outside the pocket, A&M's offense was rendered largely ineffective in their final two games this season. Eventually, turnovers in both games wore the Aggies' defense down, and the Aggies were unable to make much of a game out of either contest.

Accordingly, as with the Texans, the Aggies need to make considerable off-season upgrades in their offensive line in order to continue this season's progress against an equally difficult schedule next season.

Posted by Tom at 4:48 PM | Comments (0) |

January 1, 2005

Sabermetrics for golf?

This blog has often noted (for example, here, here and here) the increased utilization of statistical analysis in professional sports to evaluate player performance.

Now, statistical analysis of professional golf is on the rise. This fascinating Jamie Diaz Golf Digest article reviews the PGA's Shotlink program, which is a statistical engine that has measured every shot by every player in nearly every tournament (the four majors excluded) over the past two years. ShotLink compiles data in more than 250 statistical categories for every player. However, other than the occasional pearl that a television golf analyst might offer, the general public has not been provided with any meaningful analysis of the underlying data that Shotlink has gathered.

Mr. Diaz's article changes that. As he notes:

[W]hen it comes to addressing pro golf's most interesting question--what separates the best from the very good--ShotLink shines. . . [F]ive [statistical categories] have clearly emerged as leading indicators and predictors of success: "birdie average," "par breakers," "par-5 scoring average," "par-5 birdie percentage" and "going for the green" (the percentage of times a player tries to drive a par 4 or hit a par 5 in two.) In these stats in 2004, the worst ranking recorded by any of the top five players in the world--Vijay Singh, Tiger Woods, Ernie Els, Retief Goosen and Phil Mickelson--was eighth (Goosen in par breakers and Lefty in par-5 birdie percentage). Singh finished first in all but par-5 birdie percentage (Goosen led with 55.3). Woods and Els were in the top five in all five categories.

Moreover, Mr. Diaz notes that certain statistics that were previously thought to be important performance indicators really are not:

Meanwhile, categories commonly considered crucial to success were not as correlative. In greens in regulation, for example, Singh was second, but Mickelson was 10th, Goosen 17th, Woods T-47, and Els T-83. John Senden and Chris Smith, top-10 finishers in GIR, finished 114th and 115th on the money list. Nor did the long-valued total driving category (the total of rank in driving distance and driving accuracy) prove vital, with Mickelson finishing T-33, Goosen T-53, Singh T-50, Woods T-87, and Els T-112. The category leader was Jeff Brehaut, who had to return to Q school.

In addition, Shotlink generates some flat out incredible statistics:

In 2004, 31 players hit measured drives longer than 400 yards, the longest being 476 by Davis Love III on the launching pad of the downhill 18th at Kapalua's Plantation course, site of the Mercedes Championships. Brad Faxon went 362 holes without a three-putt, and Ernie Els ranked 113th in sand saves. Although Sergio Garcia is statistically the best on tour between 125 and 150 yards, in the 34 statistical categories that measured his shots within 75 yards of the hole he is 122nd or worse in all but four of them, and no better than 45th in any of them.

362 holes without a three putt? Folks, that is over 20 rounds under tournament pressure without a three putt. That has to be on par with Joe Dimaggio's record of having a base hit in 56 consecutive MLB games.

Posted by Tom at 8:06 AM | Comments (0) |

Top health care finance articles of 2004

The excellent HealthLawProf Blog provides this post that lists the 25 most read health care finance articles from Health Affairs, which is the preeminent journal on health policy and economics. The ten most read articles may be reviewed for free from the Health Affairs website through January 11.

Posted by Tom at 7:51 AM | Comments (0) |

Outstanding Tsunami feature

When you have a moment, take a look at this fine New York Times feature of photos and graphics relating to last week's killer tsunami.

By the way, when I added the donation link through Amazon to the Red Cross Tsunami Relief Fund on Wednesday, the total amount of donations was about $1.9 million. As of this writing, the total donations are in excess of $10.6 million. The power of the Internet is truly amazing.

Posted by Tom at 7:37 AM | Comments (0) |

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