My bet is that the blogosphere will ultimately provide the answer to that question more quickly than the NY Times.

Posted by Tom at 12:01 AM | Comments (1) |

August 10, 2010

Matt Simmons, R.I.P.

The Houston business community is in mourning this week over the sudden death this past Sunday of Matt Simmons, the 67 year-old investment banker, author and pundit whose views were a common topic on this blog over the years.

Matt founded Simmons & Company in Houston in the mid-1970's with his brother L.E. as one of the first investment banks focusing on the increasingly important oil field service sector of the oil and gas industry. Simmons & Company eventually expanded into other areas of the energy industry and, by the late 1990's, became one of the top energy mergers and acquisitions investment banks in the country.

Around 1983 or so, Matt's firm and my law firm were on two of the floors near the top of the 700 Louisiana building in downtown Houston, so we developed a cordial friendship over the years by taking innumerable elevator rides together. I've always been involved in a fair amount of oil and gas litigation, so Matt was always interested in that part of my practice. And during the depression in the energy industry in Texas during the 1980's, Matt was arguably the most insightful businessperson in Houston at the time on the direction of the industry and how it's recovery should be structured.

Matt was a joy to talk with -- witty, intelligent and interesting. That's one of the reasons why, over the past decade or so, he became a media favorite for providing his provocative opinions about the energy industry. Matt enjoyed his new role as one of the media's energy industry pundits, but that wasn't the best fit for the chairman of a company that was often advising companies that could be affected by his controversial opinions.

Matt retired from day-to-day management of his company in 2005 about the time his peak-oil treatise was published, but he continued on as executive chairman to help the company maintain client relationships. Matt and the company formally split ties earlier this year when he made his utterly unsurprising public comments in Fortune magazine about the probability of a British Petroleum bankruptcy.

Sadly, I didn't see Matt again after the split, so I was never able to ask him about it. But my sense is that it was probably not that big a deal for him. He was working hard on his Ocean Energy Institute and I really think that is where his heart was as he segued into elder statesman status in the energy industry.

So, the local energy industry has lost a big part of its personality with the death of Matt Simmons. Many folks in the industry did not agree with some of Matt's often controversial views, but that never stopped him from expressing those views and forcing energy businesspeople to think about the issues and formulate alternative viewpoints toward them. That is a resource that is vitally important to all industries, particularly one that is facing the current challenges of the U.S. energy industry.

Yes, Matt Simmons will be missed. Rest in peace, friend.

Posted by Tom at 12:01 AM | Comments (0) |

August 8, 2010

The demise of Mark Hurd

The big news in the business world over the weekend is the resignation of Hewlett-Packard CEO Mark Hurd. Remember when he was viewed as the savior from another high-profile CEO?

Jeff Matthews thinks that Hurd's improprieties are not all that surprising given the type of accounting tricks he used to maintain H-P's market momentum.

And Bob Sutton passes along insight into the arrogance that may have been at the core of Hurd's demise.

Man, H-P sure must have been one interesting place to work over the past several years.

Posted by Tom at 12:01 AM | Comments (0) |

August 7, 2010

Where are all the villains?

Could it be that folks are finally realizing that old-fashioned greediness really should not be a crime?

Of course, the rationalization for the lack of villains now as compared to earlier crises has never been particularly compelling.

Business prosecutions over merely questionable business judgment obscure the true nature of risk and fuel the myth that investment loss results primarily from criminal misconduct. Taking business risk is what leads to valuable innovation and wealth creation. Throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison does nothing to educate investors about the true nature of risk and the importance of diversification.

Ignorance about business risk has led in part to the criminalization of business lottery. Such a lottery breeds cynicism and disrespect for the rule of law. Isn't it about time that dubious policy be put to permanent rest?

Posted by Tom at 12:01 AM | Comments (0) |

August 6, 2010

The Tiger Mike Memos

The oil and gas business in Houston has generated its share of characters over the past century. But few have been as colorful as Edward "Tiger Mike" Davis.

Tiger Mike owned an independent exploration and production company in Houston during the boom days of the late 1970's and early 80's, and then directed his company through a volatile chapter 11 case during the depression in the oil and gas industry in the mid-80's. I have always thought that one of the most impressive credentials of Fifth Circuit Court of Appeals Chief Judge Edith Jones is that she represented Tiger Mike during his company's chapter 11 case. Based on her representation of Tiger Mike alone, Edith definitely understands the challenge of representing a difficult client.

Legend has it that Tiger Mike was born in Lebanon, had no formal education and eventually emigrated to the US, where he was a cabbie in Denver. He was hired by wealthy Helen Bonfils' husband and remained her chauffeur after his death, which eventually led to his marriage with the 70 year-old widow. After her death, Tiger Mike inherited a part of her fortune, which he invested in several drilling rigs that he later sold at a substantial profit. That was his stake into the exploration and production business, where he proceeded to drill 50-odd dry holes and spiraled into bankruptcy.

The stories of Tiger Mike resonate in Houston oil and gas circles to this day. At one point, Tiger Mike was allegedly carrying on a torrid affair with one of the McGuire sisters (a popular singing group from the 1960's) at the same time as Ms McGuire was the mistress of Sam Giancana, the notorious Chicago Mafia boss. No one was ever quite sure whether Tiger Mike had Sam's consent to that arrangement.

Another time, during a particularly difficult work-out negotiations over a botched drilling project, Tiger Mike waltzed into a conference room filled with creditors and their lawyers in his trademark one-piece khaki polyester leisure suit with white shoes and belt. He proceeded to throw his briefcase on the conference room table, grabbed a 45 caliber pistol out of the briefcase and slammed it on the table to the astonishment of everyone in the room.

"Now,"� exclaimed Tiger Mike. "It's time to deal!"�

All of which is a prelude to the the always-observant Letters of Note's posting of the hilarious Tiger Mike Memos,� a series of 22 interoffice memos that the "incredibly amusing, painfully tactless, and seemingly constantly angry"� Tiger Mike sent to his employees over the years.�

To those of us in Houston who remember Tiger Mike, none of them are surprising in the slightest. But they are fun. Enjoy!  

Posted by Tom at 12:01 AM | Comments (0) |

August 5, 2010

Jeff Skilling requests his release from prison

During my unexpected absence from the blogosphere last week, the Seventh Circuit Court of Appeals released Conrad Black from prison pending his re-trial on various business fraud charges.

That got me to thinking about what was going on in Jeff Skilling's case on the same issue, so I checked in at the Fifth Circuit and found that Skilling has also requested his release from prison. That motion -- as well as Skilling's memorandum of law on why all remaining counts against him should be reversed and the entire case remanded for retrial -- are below.

These two documents arguably provide the best description yet of the unjust nature of the criminal case against Skilling. In short, the government knew that it had a flimsy case against Skilling on conventional securities fraud (he simply believed in and touted his company like any other CEO) and wire fraud charges (he didn't steal a dime from Enron).

So, the government relied on the defective honest services wire-fraud theory to convict Skilling of crimes based on amorphous, non-criminal acts such as not acting in the best interests of the company or promoting an unhealthy culture at Enron. Having relied heavily on the now-discredited honest services wire-fraud theory in obtaining convictions against Skilling on the more conventional charges, the government simply cannot prove beyond a reasonable doubt (it's burden on remand under such circumstances) that the jury did not rely on the acts relating to the honest services wire-fraud charges in convicting Skilling on the other charges.

Does the end of convicting a business executive of a crime justify the means by which government prosecutors accomplish it?

James Brown, the former Merrill Lynch executive and one of the defendants in the Enron-related criminal case known as the Nigerian Barge case, has to be asking himself that question as he continues to endure what is now his seventh year of prosecutorial hell.

Even in the littered landscape of failed Enron-related prosecutions, the Nigerian Barge prosecution stands out for its sheer brazen nature.

As noted in this post from almost five years ago (!), the Nigerian Barge prosecution was baseless from the start and, as later developments revealed, trumped-up to boot.

But as Brown's Supplemental Memorandum below filed this past Friday explains, "trumped-up" is too kind a term to describe what the prosecutors did to Brown and his fellow Merrill co-defendants.

A quick history of the case is helpful. After prosecuting Arthur Andersen out of business in the intensely anti-business post-Enron climate of Houston in 2004, the Enron Task Force threatened to do the same to Merrill Lynch unless the firm served up some sacrificial lambs, which the firm did by offering up Brown and fellow Merrill executives Dan Bayly, Robert Furst, and William Fuhs.

Through a deferred prosecution agreement with Merrill, the Task Force hamstrung the Merrill defendants' defense by limiting access to other Merrill Lynch executives who were involved in the barge transaction and who would have testified favorably for the defendants. To make matters worse, the Task Force then intimidated other potentially exculpatory witnesses by threatening to indict them if they cooperated with the Merrill defendants' defense.

Thus, after bludgeoning a couple of plea deals from former Enron executives Ben Glisan and Michael Kopper, the Task Force proceeded to put on a paper-thin case against the Merrill defendants, which was good enough to obtain convictions in Houston's deeply-hostile environment in 2005 toward anyone having anything to do with Enron.

Of course, most of the convictions were vacated on appeal (and in Fuhs' case, thrown out completely). However, each of the Merrill defendants served over a year in prison during their appeal while their families endured the substantial human cost of this and other misguided Enron-related prosecution.

Even after the convictions of the Merrill defendants were vacated, the Department of Justice initially threatened to pursue a retrial of the three remaining Merrill executives. But then the DOJ recently dismissed all charges against Bayly, while Furst cut a favorable plea deal that will lead to a dismissal of the remaining charges against him.

So, logic dictates that the DOJ would dismiss its charges against Brown, the only remaining defendant. Right?

Well, not so fast.

The DOJ has inexplicably teed up another trial of Brown, who was the only one of the Merrill defendants who was convicted on additional charges of perjury and obstruction of justice for having the temerity of protesting his innocence to the grand jury that originally investigated the Nigerian Barge deal. Brown's new trial is currently scheduled to begin on September 20.

But in the meantime, Brown's legal team has been leafing through enormous amounts of exculpatory evidence that the Enron Task Force withheld from the Merrill defendants in connection with the first trial back in 2005, but which the DOJ has recently been forced to disclose.

The result of the Brown team's effort is set forth below in the Supplemental Memorandum in support of a motion for a new trial for Brown on the perjury and obstruction charges (the downloaded version of the memo is bookmarked in Adobe Acrobat to facilitate ease of review). The memorandum details the appalling length that the Enron Task Force went during the first trial in suppressing exculpatory evidence in favor of Brown and his co-defendants and generally disregarding the rule of law in order to obtain convictions. As the memorandum concludes:

The conclusion is now inescapable that the ETF engaged in a calculated, multi-step process to deprive Brown of his constitutional right to Due Process. (1) They repeatedly denied the existence of Brady material, told this court they had met their Brady obligations and fought vehemently against producing anything [exhibit reference and footnote omitted]. They highlighted only selected material in a veritable garden of Brady evidence -- much of their selections being vague, tangential or marginal -- while working around clear, declarative, relevant exculpatory material even in the same page, paragraph or document. (3) When ordered by the Court to produce summaries to the defense, they further redacted even the Brady material they had themselves highlighted and withheld the crucial facts that they had highlighted as Brady. (4) They egregiously capitalized on their misconduct at trial by making assertions that were directly belied by the exculpatory evidence they withheld.  .  .  .

The memorandum goes on to set out dozens of Brady violations, including charts that compare the exculpatory statements that the Enron Task Force withheld prior to the first trial with the incriminating statements that the Enron Task Force extracted from witnesses during that trial.

Folks, this is really bad stuff. But as bad as it is, I have not seen any mention of it in the mainstream media.

When is the mainstream media going to realize that the scandalous behavior of government prosecutors in prosecuting business executives in connection with the Enron case dwarfs the true crimes that were committed at Enron?

Or is the media's obdurate refusal to challenge the Enron narrative an even bigger scandal than the prosecution's misconduct?

Posted by Tom at 12:00 AM | Comments (1) |

July 9, 2010

The Politics of Ignorance

If you tire of the seemingly endless demagogic blather that governmental officials and pundits often pass off as discussion of key societal issues, then be sure to read this insightful Will Wilkinson post on the politics of ignorance:

The problem [of ideologues elevating doctrine over wisdom] is heightened by the fact that the reading public generally enjoys ideologues more than three-handed scholars, and so the more ideological among ideologues find themselves with larger audiences and more numerous and remunerative opportunities to publicly opine.

What results is not so much an exercise in public reason as a smash-em-up reputation derby, where elites vie to increase their pull with the public and policymakers by disparaging ideological competitors. Moves in the reputation game take many forms, from sniffs of imperious condescension, to bald �stupidest man alive� name-calling, to self-congratulatory above-the-fray comments like this one. There is no reason to trust that this is a process through which truth unfolds.

In the absence of institutions that limit the scope of democratic authority over intractably complex policy questions, the best we can hope for is perhaps a tad more self-awareness among opinion elites about their tendencies toward dogmatism and for the rise of norms that do more to reward the honestly judicious and penalize highly-regarded doctrinaire assholes.

As noted earlier here and here, the instinct of most politicians and much of the mainstream media is to embrace simple �villain and victim� morality plays when attempting to explain a particular trouble.

Take, for example, investment loss. The more nuanced story about the financial decisions that underlie a failed investment strategy doesn't garner sufficient votes or sell enough newspapers to generate much interest from the demagogues or muckrakers. That's why we periodically endure witch hunts, such as the recent one demonizing speculators. That�s also why it's important that our leaders who are ignorant about the function of speculation in markets take a moment to understand its beneficial purpose.

Morality plays are comforting because they make it easy to identify and demonize the villains who are supposedly responsible for trouble. The truth is usually far more nuanced and complicated, but ultimately more rewarding to embrace.

Posted by Tom at 12:01 AM | Comments (1) |

July 7, 2010

At least tell him that he is a sacrificial lamb

Regular readers of this blog are familiar with the technique that federal prosecutors used in the post-Enron era to score easy convictions against businesspeople.

Threaten to go Arthur Andersen on a company, offer to let the company off the hook under a deferred prosecution agreement in return for offering up an executive or two as sacrificial lambs to be prosecuted, and then bludgeon the individual�s career, life and family into bits under the sledgehammer of the DOJ�s prosecutorial power.

Jamie Olis was arguably the first of those sacrificial lambs, and there were plenty in connection with the Enron-related prosecutions. Heck, the DOJ is even getting ready to tee up a re-trial of one such case this September.

But check out this example of DOJ brazenness that Ellen Podgor passes along. The DOJ enters into a deferred prosecution agreement with American Express and, as a part of the deal, has AE enter into a side-letter agreement that, absent the DOJ�s prior consent, prohibited AE executive Sergio Masvidal from obtaining employment with an AE unit or any company that bought the AE unit.

Given the DOJ�s heavy-handed approach in such matters, that part of the deferred prosecution agreement is not all that unusual. But one aspect of this particular deal was.

The DOJ didn�t bother to disclose the side-letter to either Masvidal or the District Court that approved the deferred prosecution agreement.

Masvidal eventually found out about it when he was denied employment by the company that bought the AE unit. So, he sued the DOJ, which eventually led to the DOJ�s issuance of the letter below, which admits that the DOJ did not disclose the side-letter to the District Court on purpose and that the DOJ�s investigation �did not reveal any evidence that Mr. Masvidal had committed any criminal offenses or violated any banking regulations.�

Now, do you still have any doubts that the same bunch was capable of this and this?

Posted by Tom at 12:00 AM | Comments (3) |

July 2, 2010

Rational Optimism

Matt Ridley supplies a dose of good end-of-the-week vibes with this article based on his new book, The Rational Optimist (Harper 2010):

When I set out to write a book about the material progress of the human race, now published at The Rational Optimist, I was only dimly aware of how much better my life is now than it would have been if I had been born 50 years before. I knew that I have novel technologies at my disposal from synthetic fleeces and discount airlines to Facebook and satellite navigation. I knew that I could rely on advances in vaccines, transplants and sleeping pills. I knew that I could experience cleaner air and cleaner water at least in my own country. I knew that for Chinese and Japanese people life had grown much more wealthy. But I did not know the numbers.

Do you know the numbers? In 2005, compared with 1955, the average human being on Planet Earth earned nearly three times as much money (corrected for inflation), ate one-third more calories of food, buried one-third as many of her children and could expect to live one-third longer. All this during a half-century when the world population has more than doubled, so that far from being rationed by population pressure, the goods and services available to the people of the world have expanded. It is, by any standard, an astonishing human achievement.

We invent new technologies that decrease the amount of time that it takes to supply each other�s needs. The great theme of human history is that we increasingly work for each other. We exchange our own specialised and highly efficient fragments of production for everybody else�s. The �division of labour� Adam Smith called it, and it is still spreading. When a self-sufficient peasant moves to town and gets a job, supplying his own needs by buying them from others with the wages from his job, he can raise his standard of living and those he supplies with what he produces. [.  .  .]

So ask yourself this: with so much improvement behind us, why are we to expect only deterioration before us? I am quoting from an essay by Thomas Macaulay written in 1830, when pessimists were already promising doom:

�They were wrong then, and I think they are wrong now.�

Posted by Tom at 12:00 AM | Comments (0) |

June 30, 2010

Financial Ed 101

It�s good to see that James Surowiecki has come around to my way of thinking that better investor education is far more likely to hedge the risk of future financial scandals than throwing a few business executives in prison:

The government�s new consumer-protection agency has the authority to �review and streamline� financial literacy programs, but that�s not enough. We really need something more like a financial equivalent of drivers� ed. There�s evidence that just improving basic calculation skills and inculcating a few key concepts could make a significant difference. One study of the few states that have mandated financial education in schools found that it had a surprisingly large impact on savings rates.   .   .   .The point isn�t to turn the average American into Warren Buffett but to help people avoid disasters and day-to-day choices that eat away at their bank accounts. The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime. And, as the past ten years have shown us, the cost to society can be far greater than that.

Surowiecki is spot-on with his observation (as is this TGR post on Surowiecki's article), but the promoters of the Greed Narrative continue to protest -- what about the innocent victims who lost their nest eggs as a result of the collapse of a company such as Enron?

Well, one of the main reasons that those victims' nest eggs ever had value in the first place was because innovative executives such as Jeff Skilling and Ken Lay transformed Enron into the world's leading energy risk management company through the creative use of futures and options contracts to hedge price risk for natural gas producers and industrial consumers.

Although it�s fine to feel sorry for someone who loses money on an investment, the Greed Narrative ignores the fact that most of those "victims" who lost their nest eggs were imprudent in their investment strategy. Taking Enron as an example, those investors should have diversified their Enron holdings or bought a put on their Enron shares that would have allowed them to enjoy the rise in Enron's stock price while being protected by a floor in that share price if it fell below a certain value. Those are the type of precautions that a prudent � and well-educated � investor would take in regard investing in a trust-based business.

Incongruously, while virtually all of those Enron "victims" hedged the risk of their investment in their homes by purchasing homeowner's insurance, few of them hedged the risk of their investment in Enron stock. Most of them simply did not understand how Enron's risk management services created their nest egg in the first place. Thus, when those nest eggs evaporated during the bank run on Enron, those investors didn't even try to understand what truly had occurred. They simply embraced the easy-to-understand Greed Narrative.

The Greed Narrative's devastating impact is that it obscures the true nature of investment risk and fuels the myth that investment loss results primarily from someone else's misconduct. As Larry Ribstein has been asking for years, do we really want to be sending a message to investors that risk is bad when it often leads to valuable innovation and wealth creation?

Do we really want to allow prosecutors and regulators to paint such beneficial transactions as frauds and then manipulate the public's ignorance to demonize innovative risk-takers?

At a time when America desperately needs innovators and entrepreneurs to create jobs and wealth, better education for investors makes much more sense than the paths we have been taking.

Posted by Tom at 12:01 AM | Comments (3) |

June 29, 2010

To File or Not to File, That is BP’s Question

Ever since the Deepwater Horizon oil well blowout in late April, friends in my line of work and I have been debating whether British Petroleum is going to file a chapter 11 case to reorganize while dealing with the huge and still-to-be determined liabilities arising from the catastrophe.

As the spill spiraled out of control, my sense was that the question about a BP bankruptcy filing was not whether the company would file, but rather �when� and �where.� Just dealing with the tens of thousands of claims that will be asserted against BP in hundreds of courts across the U.S. cries out for centralized bankruptcy processing from a logistical standpoint, if nothing else.

But from a purely financial standpoint, the question of whether BP will need to file is a closer call. As Joe Schaefer outlines here, BP is a hugely profitable, hard-asset based company that is � at least on paper -- capable of weathering this financial firestorm outside of bankruptcy protection, particularly if the relief well is successful and restores investor confidence in BP�s capacity to deal with the liabilities. 

On the other hand, as Craig Pirrong reminds us (related NY Times article here), BP�s financial situation is perilous and could deteriorate with Enronesque speed if the markets lose trust in BP�s capacity to perform on its contractual obligations. Those CDS spreads are indeed ominous.

Stay tuned.

Posted by Tom at 12:01 AM | Comments (0) |

June 26, 2010

The Wall Street Journal’s inadequate apology

It's as if the nation's leading business newspaper doesn't want to face the ugly reality of what it helped create.

This Wall Street Journal editorial applauds the U.S. Supreme Court's opinion reversing Jeff Skilling's conviction on honest services wire fraud charges. But when it comes to the WSJ's role in fanning the flames of public disdain toward business executives that helped to allow this injustice to occur, the WSJ apologizes only to Conrad Black:

The Black and Skilling cases are precisely the kind involving high-profile, unsympathetic defendants in which willful prosecutors like Mr. Fitzgerald are inclined to abuse the honest services law. They know the media won't write about the legal complexities, and they know juries are often inclined to find a rich CEO guilty of something. We regret that in the case of Mr. Black, that failure of media oversight included us.

But what about an apology to Mr. Skilling? Take it from me WSJ, that lack of media oversight also included you in regard to the Skilling and other Enron-related criminal cases.

Indeed, four years ago the WSJ editorial board was patting the Enron Task Force on the back despite the fact that it was clear at the time that the Task Force had improperly applied the honest services wire fraud statute and engaged in massive prosecutorial misconduct in regard to the Skilling prosecution and numerous other Enron-related criminal prosecutions.

The WSJ's failure to admit its egregious failures in its coverage of Enron reminds me of a point that John Carney raised several years ago in regard to Eliot Spitzer's odious tenure as New York Attorney General:

Why didn't [the mainstream media covering Spitzer's investigation of Grasso] reveal the slimy tactics of the Spitzer squad? We suspect part of the problem was the fear of being "cut off" of access. Reporters compete for scoops, and often those scoops depend on sources who will leak information to them. In the NYSE case, reporters assigned to the story were largely at the mercy of the investigators, who could cut-off uncooperative reporters, leaving them without copy to bring to their editors while their competitors filed stories with the newest dirt. They probably felt - not unrealistically - that their very jobs were on the line.

This reveals an unfortunate state of affairs. Playing bugle boy while government officials call the tunes from behind a veil of anonymity is not investigative journalism - it's hardly journalism at all. It's closer to propaganda. It would have been far better had the journalists turned their backs on the Spitzer squad, or even revealed these tactics to the public. Sure they may have lost some "good" stories but they could have painted a truer picture of what was going on. But that's probably too much to hope for.

The same type of mainstream media dissonance went on in regard to the Enron-related prosecutions.

In point of fact, this Ayn Rand Institute press release that was issued in 2006 just a couple of months after the WSJ patted the Enron Task Force on the back is remarkably prescient in regard to the mainstream media's abysmal coverage of Enron in general and Skilling's trial, in particular:

The Media's Mistreatment of Jeff Skilling

Upon hearing the news that former Enron CEO Jeffrey Skilling was sentenced to 24 years, most Americans, trusting the newspaper articles and books they have read on Enron, think that justice has been served. But, said Alex Epstein, a junior fellow at the Ayn Rand Institute, "Jeff Skilling has not gotten justice, and the media bear a major portion of the blame.

"Few Americans know that during Skilling's trial, the prosecution came nowhere near proving its central allegation that Jeff Skilling engineered a conspiracy to defraud investors. Few know that Skilling, upon leaving Enron five months before its collapse, destroyed no documents, nor did anything else resembling a criminal cover-up. Few know that the prosecution, unable to prove a conspiracy, spent huge swaths of the trial taking pot-shots at Skilling with issues not even mentioned in the indictment, such as the failure of Skilling, a multi-millionaire many times over, to disclose a failed $50,000 investment to Enron's board.

"The media's mis-portrayal of the case against Skilling long predates the trial. Ever since the fall of Enron, most of the media have treated as fact every conceivable smear against Skilling made by ax-grinding prosecutors or ex-Enron employees, while treating as absurd Skilling's claim that he neither engineered a conspiracy nor lied to investors.

"There can be no doubt that the media's treatment of Skilling contributed to his conviction for a phantom conspiracy--and to the outrageous 24-year sentence that he has now received. And the mistreatment of Skilling is part of a broader trend: the trend of treating businessmen as guilty until proven innocent. Our journalists and intellectuals, accepting the idea that the pursuit of profit is morally tainted, assume that whenever anything goes wrong in business, it is the result of crooked behavior by greedy, rich CEOs--and slant their coverage accordingly. This practice is putting numerous innocent men in jail, and instilling terror throughout corporate America.

"During Skilling's appeal, let us call for the media to start treating Skilling--and all businessmen--fairly."

The WSJ was right to apologize to Lord Black. But it also owes one to Jeff Skilling, as well as to its readers.

Posted by Tom at 12:01 AM | Comments (3) |

June 23, 2010

What motivates us

Dan Pink presents thoughts on how to motivate people (H/T Political Calculations).

Posted by Tom at 12:00 AM | Comments (1) |

June 15, 2010

On Leadership

If you read just one article this week, make it this one (H/T Mike at Crime & Federalism)  � William Deresiewicz�s lecture to the plebe class at the United States Military Academy at West Point last year. A snippet:

That�s really the great mystery about bureaucracies. Why is it so often that the best people are stuck in the middle and the people who are running things�the leaders�are the mediocrities?

Because excellence isn�t usually what gets you up the greasy pole. What gets you up is a talent for maneuvering. Kissing up to the people above you, kicking down to the people below you. Pleasing your teachers, pleasing your superiors, picking a powerful mentor and riding his coattails until it�s time to stab him in the back. Jumping through hoops. Getting along by going along. Being whatever other people want you to be, so that it finally comes to seem that, like the manager of the Central Station, you have nothing inside you at all. Not taking stupid risks like trying to change how things are done or question why they�re done. Just keeping the routine going.

I tell you this to forewarn you, because I promise you that you will meet these people and you will find yourself in environments where what is rewarded above all is conformity. I tell you so you can decide to be a different kind of leader. And I tell you for one other reason.

As I thought about these things and put all these pieces together�the kind of students I had, the kind of leadership they were being trained for, the kind of leaders I saw in my own institution�I realized that this is a national problem. We have a crisis of leadership in this country, in every institution. Not just in government. Look at what happened to American corporations in recent decades, as all the old dinosaurs like General Motors or TWA or U.S. Steel fell apart. Look at what happened to Wall Street in just the last couple of years. [.  .   .]

We have a crisis of leadership in America because our overwhelming power and wealth, earned under earlier generations of leaders, made us complacent, and for too long we have been training leaders who only know how to keep the routine going. Who can answer questions, but don�t know how to ask them. Who can fulfill goals, but don�t know how to set them. Who think about how to get things done, but not whether they�re worth doing in the first place. What we have now are the greatest technocrats the world has ever seen, people who have been trained to be incredibly good at one specific thing, but who have no interest in anything beyond their area of expertise. What we don�t have are leaders.

What we don�t have, in other words, are thinkers. People who can think for themselves. People who can formulate a new direction: for the country, for a corporation or a college, for the Army�a new way of doing things, a new way of looking at things. People, in other words, with vision.

Posted by Tom at 12:01 AM | Comments (1) |

June 14, 2010

Stuff happens

In this NY Times op-ed, Richard Thaler picks up on a theme that Ken Rogoff and James Hamilton raised last week � the similarity between the miscalculation of risks relating to the Gulf of Mexico oil spill and the Wall Street financial crisis:

AS the oil spill in the Gulf of Mexico follows on the heels of the financial crisis, we can discern a toxic recipe for catastrophe. The ingredients include risks that are erroneously thought to be vanishingly small, complex technology that isn�t fully grasped by either top management or regulators, and tricky relationships among companies that are not sure how much they can count on their partners.

For the financial crisis, it has become clear that many chief executives and corporate directors were not aware of the risks taken by their trading desks and partners. Recent accusations against Goldman Sachs suggest the potential for conflicts of interest among banks, investors, hedge funds and rating agencies. And it is clear that regulators like the Securities and Exchange Commission, an agency staffed primarily with lawyers, are not well positioned to monitor the arcane trading strategies that helped produce the crisis.

The story of the oil crisis is still being written, but it seems clear that BP underestimated the risk of an accident. Tony Hayward, its C.E.O., called this kind of event a �one-in-a-million chance.� And while there is no way to know for sure, of course, whether BP was just extraordinarily unlucky, there is much evidence that people in general are not good at estimating the true chances of rare events, especially when human error may be involved. [.  .  .]

How can government reduce the frequency and the severity of future catastrophes? Companies that have the potential to create significant harm must be required to pay for the costs they inflict, either before or after the fact. Economists agree on this general approach. The problem is in putting such a policy into effect.

Suppose we try to tax companies in advance for activities that have the potential to harm society. First, we have to have some basis for estimating the costs they may inflict. But before the recent disasters, companies in both the financial and oil drilling sectors would have claimed that the events we are now trying to clean up were, well, one-in-a-million risks, suggesting a very low tax.

Alternatively, an offending party could be made to pay after the fact, by holding it responsible for the costs it imposes. BP has volunteered that it will pay for all damages it considers �legitimate,� but we can expect a fight over how to define that word.

.   .    .  Suppose a company worth only $1 billion was responsible for this accident. It would go bankrupt and we would be unable to collect. And if we aren�t careful, we will encourage companies that have enough money for collection to leave the drilling to those that don�t. [.  .  .]

We are left in a difficult place. Neither the private nor the public sector seems up to handling these kinds of problems. And we can�t simply wait for the next disaster, because, as people might say if they had to use G-rated language, stuff happens.

Professor Hamilton zeros in on the group dynamic that leads to the underestimation of risk:

I think part of the answer, for both toxic assets and toxic oil, has to do with a kind of groupthink that can take over among the smart folks who are supposed to be evaluating these risks.

It's so hard to be the one raising the possibility that real estate prices could decline nationally by 25% when it's never happened before and all the guys who say it won't are making money hand over fist.

And this interacts with the forces mentioned above. When the probability of spectacular failure appears remote, and moreover it hasn't happened yet, it's hard to set up incentives, whether you're talking about a corporation or a regulatory body, in which the person who makes sure that the risks stay contained is the person who gets rewarded. When everyone around you starts thinking that nothing can go wrong, it's hard for you not to do the same. It can become awfully lonely in those environments to try to be the voice of prudence.

Finally, Cato's Gerald O'Driscoll, Jr. notes the futility of reacting to the oil spill by implementing even more regulation:

What is the missed lesson from all this? When President George W. Bush had his Katrina moment, the federal government's bumbling response was blamed on him, on the Republicans, and on conservatives. Now it is President Obama's turn. His administration's faltering response to the disaster in the Gulf is attributed to his personal failings, staff ineptitude, communication failures, etc. And, of course, the two administrations have shared responsibility for the poor handling of the financial crisis.

A big-government conservative administration failed in crisis, as has a big-government liberal administration. The regulatory state did not prevent excessive risk taking whether in financial services, nor perhaps in offshore oil drilling. Government response to crises once they occur is slow and inept. All this is not because either Republicans or Democrats are in power, but because big government doesn't work. It can't deliver on its promises. Big government overpromises and underdelivers. In reaching to do more, big government accomplishes less. That is not an ideological statement, but an empirical observation.

In the case of financial services, virtually all the proposed regulatory reform offers more of the same. Additional regulations will be added to existing ones without addressing why existing ones failed to prevent the crisis. The same process will likely happen with respect to offshore drilling.

The oil spill has triggered an important debate about the value of off-shore drilling, and that debate might conclude that off-shore drilling generates more harm than benefit.

But despite the nightly photos and videos of the oil spill on television, it�s important to remember that drilling produces benefits in addition to its costs. Deep-sea drilling has been ongoing for decades with relatively few incidents that even come close to the current spill.

So, while this spill may reveal that deep-sea drilling is too risky, it�s also quite possible that this incident was simply the result of poor decision-making combined with bad luck, and that there is a nominal chance that it will reoccur.

And it is very difficult to regulate bad decision-making and bad luck.

Stuff happens, indeed.

Posted by Tom at 12:01 AM | Comments (3) |

June 11, 2010

Lessons on governmental decision-making

This blog started in February 2004 and the first post about what to do with the Astrodome was in September 2004.

Over the intervening six years, there have been a couple of dozen posts about the various boondoggles that have been proposed for the Dome. To date, no one has put up a penny to redevelop the Dome.

Despite this dismal track record, Harris County officials are still dithering over what to do with the Dome.

At least the current proposals are similar to the one that I made a couple of years ago. That is really the only one that makes much sense for the facility. Typical to Harris County�s handling of this situation, there is no mention in the Chronicle article that Harris County officials have had any discussions with Texas Medical Center officials about development and financing of such a venture. Thus, at this point, it would appear that the only financing for such a project would be on the County's dole.

And in an amazing display of blindness, County officials are planning not to convert the land that the Dome sits on into badly needed additional parking for the Reliant Park area if the decision is made to raze the facility. Why not generate some revenue from the land to help pay off the $35 million in bond debt that still exists on the Dome?

Oh well. There are many lessons to be drawn from this experience, but two in particular:

1. If you can�t figure out what to do with something in six years, then it�s probably time to get rid of it; and

2. Don�t ever rely on governmental officials to make sound decisions.

Posted by Tom at 12:01 AM | Comments (1) |

June 10, 2010

Are you an Asker or a Guesser?

According to Andrea Donderi, as described here by The Guardian�s Oliver Burkeman, it depends on the culture in which you were raised:

We are raised, the theory runs, in one of two cultures.

In Ask culture, people grow up believing they can ask for anything � a favour, a pay rise� fully realising the answer may be no.

In Guess culture, by contrast, you avoid "putting a request into words unless you're pretty sure the answer will be yes� A key skill is putting out delicate feelers. If you do this with enough subtlety, you won't have to make the request directly; you'll get an offer. Even then, the offer may be genuine or pro forma; it takes yet more skill and delicacy to discern whether you should accept."

Neither's "wrong", but when an Asker meets a Guesser, unpleasantness results. An Asker won't think it's rude to request two weeks in your spare room, but a Guess culture person will hear it as presumptuous and resent the agony involved in saying no.  .   .   .

This is a spectrum, not a dichotomy, and it explains cross-cultural awkwardnesses, too. Brits and Americans get discombobulated doing business in Japan, because it's a Guess culture, yet experience Russians as rude, because they're diehard Askers.

Applying this to legal education, my sense is that law schools try to develop Askers into trial lawyers, while the die-hard Guessers among law students probably gravitate toward non-litigation areas. Off hand, I cannot recall in my experience a particularly effective litigator who was anything other than an Asker. On the other hand, I know a number of good deal lawyers who are Guessers. What do you think?

Posted by Tom at 12:01 AM | Comments (1) |

June 9, 2010

The futility of regulating failure

David Warren makes a remarkably lucid point about the dubious notion that governmental action is the proper remedy to any wrong:

Politicians try to pass laws against it; to create rules and regulations so complex and cumbersome that (as we saw in the BP disaster) an easily-corrupted "judgement call" bureaucracy must grant exemptions from them, in order for anything to function at all. When disaster strikes, they add more rules and regulations.

But more profoundly, the rules and regulations -- once they pass a point of irreducible complexity -- create a mindset in which those who should be thinking about safety are instead focused on rules and regulations. To those who see danger, the glib answer comes, citing all the safety standards that have been diligently observed.

From what we already know, this appears to be exactly what happened aboard Deepwater Horizon, and will not be rectified by the U.S. government's latest, very political decision, to use means both fair and foul to prosecute British Petroleum, and punish the rest of the oil industry for its mistakes.

Let me mention in passing that President Barack Obama was in no way responsible for the catastrophe, and that there is nothing he can do about it. He is being held to blame for "inaction," as wrongly as his predecessor was held to blame over Hurricane Katrina, by media and public unable to cope with the proposition that, "Stuff happens."

In a sense, Obama is hoist on his own petard. The man who blames Bush for everything now finds there are some things presidents cannot do. More deeply, the opposition party that persuades the public government can solve all their problems, discovers once in power there are problems their government cannot solve.

Alas, it will take more time than they have to learn the next lesson: that governments which try to solve the insoluble, more or less invariably, make each problem worse.

I like to dwell on the wisdom of our ancestors. It took us millennia to emerge from the primitive notion that a malignant agency must lie behind every unfortunate experience. Indeed, the Catholic Church spent centuries fighting folk pagan beliefs in things like evil fairies, and the whole notion the Devil can compel any person to act against his will -- only to watch an explosion of witch-hunting and related popular hysterias at the time of the Reformation.

In so many ways, the trend of post-Christian society today is back to pagan superstitions: to the belief that malice lies behind every misfortune, and to the related idea that various, essentially pagan charms can be used to ward off that to which all flesh is heir. The belief that, for instance, laws can be passed, that change the entire order of nature, is among the most irrational of these.

Sheer human stupidity is the cause of any number of human catastrophes -- including the stupidity of superstition itself. We need to re-embrace this concept; to hug the native incompetence within ourselves, and begin forgiving it in others.

Amen.

Posted by Tom at 12:01 AM | Comments (3) |

May 25, 2010

Is the wild ride of Landry’s investors finally over?

Owning an interest in Houston-based Landry�s Restaurants, Inc. over the past several years has not been for the faint-hearted.

But maybe � just maybe � the patience of long-term holders of Landry�s stock is finally going to be rewarded.

This story began back in July of 2007 when Landry�s announced that it was delinquent in its regulatory filings with the SEC and that it was in need of refinancing over $400 million in debt in a rapidly deteriorating debt market. Shortly thereafter, the company sued some of its bondholders for declaring the company in technical default under their bonds, but the company quickly settled that litigation on not particularly good terms.

A few months later, Landry's announced in January 2008 that its CEO and major shareholder (39%), Tilman Fertitta, had made an offer to take the company private by buying the other 61% of the company's stock for $23.50 share, which worked to be a $1.3 billion deal, including debt.

Given the circumstances, that offer sounded pretty good, particularly given that the proposed purchase price was a 40% premium over the $16.67 share price at the time of the offer.

Unfortunately, a flurry of shareholder lawsuits followed Fertitta's bid. By early March, 2008, it was apparent that Fertitta's bid was so speculative that he hadn't even lined up financing for it.

So, in April of 2008, Fertitta lowered his offer to $21 per share because of "tighter credit markets", and Landry's board announced in June of that year that it had accepted that price.

But by the fall of 2008, the financial crisis on Wall Street had roiled credit markets even further and Hurricane Ike caused considerable damage to several Landry's properties.

So, in October of 2008, Fertitta lowered his offer to $13.50 per share.

Then, in mid January of 2009, Landry's announced that it was terminating the proposed deal with Fertitta. The reason was a bit convoluted, but the gist of it was that Landry's contended that the SEC was requiring the company to issue a proxy statement disclosing information about a confidential commitment letter from the lead lenders on the buyout deal.

Amidst all this, Landry's stock was tanking, closing at under $5 per share.

Meanwhile, while the take-private bids languished and the company's stock plummeted to historic lows, Fertitta continued to buy more Landry's stock so that he now controls somewhere in the neighborhood of 55% of the company's shares.

Yes, that's right. Despite Fertitta�s series of unsuccessful take-private offers over the previous couple of years, Landry's board failed to obtain a standstill agreement from Fertitta that would have prevented him from taking a majority equity position while Landry's stock price was tanking.

So, given all that, could Fertitta and the Landry's directors screw things up any worse?

How about proposing yet another deal in which Fertitta would buyout Landry's other shareholders in return for giving them an equity stake in a publicly-owned spin-off (Saltgrass Steakhouse) in a brutally competitive niche of the restaurant market?

After shareholders and the markets widely panned that spinoff proposal, Landry's board tentatively approved an offer from Fertitta to buy the balance of Landry's shares for $14.75 per share. Compared to the spinoff proposal, Fertitta's cash offer looked relatively good.

There was just one small problem with Fertitta's proposal. Under Delaware corporate law, Fertitta had to agree that his proposal was subject to a requirement that a majority of the Landry's shares that Fertitta did not control have to approve the deal.

Enter William Ackman and his Pershing Square Capital Management hedge fund. Pershing Square bought up a bunch of Landry's shares and announced that it opposed Fertitta's buyout offer.

So, assuming your head isn�t still spinning from all that, what�s the latest with Landry�s?

Yesterday, the Landry�s board accepted a $24-a-share takeover offer by Fertitta ($.50 more than his January 2008 offer back when he owned only 39% of the company), which makes for about $1.4 billion deal.

In addition, Landry�s has the right to shop Fertitta�s offer for 45-days in an effort to obtain a higher offer and doesn�t have to pay Fertitta a break-up fee if such a higher offer is obtained. Of course, no one other than Fertitta has shown any interest in acquiring Landry�s, but that�s a nice touch, anyway.

The deal has a couple of contingencies, including court approval of a partial settlement of Delaware class action litigation against Fertitta and certain company directors.

Likewise, the deal must be approved by a majority of shareholders not affiliated with Fertitta, namely Ackman and Pershing Capital. But given the pricing of the deal � and the profit that Pershing Capital looks to make on its investment � such approval would appear to have been lined up already. So, Landry�s investors may finally receive a decent payoff for their wild ride over the past three years.

As the past three years have shown, Landry�s investors shouldn�t count their chickens before this deal hatches. But if it does, you can count on one thing about Landry�s.

The days of Landry�s as a publicly-owned company are over. For good.

Update: Steve Davidoff doesn't think that Pershing Capital will necessarily play ball with Fertitta's bid. With the paucity of bidders for Landry's, it seems unlikely to me that Pershing Capital would take the risk of opposing the deal. But you never know in the wild world of Landry's.

Posted by Tom at 12:01 AM | Comments (0) |

May 20, 2010

Is freedom possible without wealth?

From the fine HBO John Adams mini-series, Thomas Jefferson and Alexander Hamilton debate the relative importance of the creation of wealth to American society. Amazingly, the debate lives on today.

Posted by Tom at 12:00 AM | Comments (0) |

May 5, 2010

The beneficial nature of derivatives

I don't watch much television news. But when I catch a glimpse these days, it always seems as if some politician is loudly declaring the need for more governmental financial regulation.

Mostly, the politicos contend that financial derivatives are dangerous instruments that are contrary to sound public policy. We have to protect those poor souls who bet against John Paulson, don't you see?

But the proponents of this view simply do not want to understand the nature of derivatives, just as most of the same ones didn't want to understand the valuable nature of the risk management of natural gas prices that Ken Lay and Jeff Skilling contributed to markets 20 years ago.

Derivatives are simply a way for an investor to warn by trading - that is, by putting his money where his mouth is - that he has information about an upcoming shift in the markets. That facilitates a transparent and well-informed marketplace.

However, heavily regulating traders from taking advantage of that valuable source of information only makes it more difficult for valuable information about market shifts to reach the marketplace. How is that good for investors seeking as transparent and well-informed marketplace as possible?

An underappreciated cause of the Wall Street crisis was the underlying information failure. As opposed to restricting trading, we ought to be finding ways to bring more information to the market faster so that prices can be adjusted promptly. Rather than demonizing folks who bet their money in bringing information to the marketplace, we ought to be encouraging them.

I won't hold my breath waiting for that to happen.

Posted by Tom at 12:01 AM | Comments (2) |

May 3, 2010

The next victim of the criminalization-of-business lottery?

Although it really shouldn't have surprised anyone, the big business news at the end of last week was the the Department of Justice had opened up a criminal probe of Goldman Sachs well before the filing of the SEC's lawsuit a couple of weeks ago.

Craig Pirrong provides his typically lucid perspective toward the news, while the Epicurean Dealmaker insightfully notes a dynamic involved in the growing cascade against Goldman Sachs that should concern us all. Interestingly, that dynamic is the same one that was involved in the prosecution to death of former Enron chairman, Ken Lay.

Frankly, after almost a decade of misdirected prosecutions of businesspeople, it's confounding that many citizens believe that a prosecution of Goldman Sachs would serve any useful public interest.

It is indisputable that government cannot possibly discover or prosecute all business fraud. But government policies that purport to prevent fraud by prosecuting simply prompt private parties to be less careful in detecting or avoiding fraud in the first place.

Moreover, the utter randomness of the criminalization-of-business policy undermines the public's respect for the rule of law. For example, who can possibly keep up with all the rules that government has invoked in determining whether an important businessperson gets prosecuted for a supposed business crime?

First, there was the Apple Rule, which was quickly followed by the Dell Rule.

Then there was the Buffett Rule, closely followed by the GM Rule.

And who could forget the Geithner Rule?

Frankly, the rule of law has been replaced by what Larry Ribstein has coined the criminalization-of-business lottery where winning or losing becomes random.

For instance, the owners of Long Term Capital Management may have been the earliest winners in the most recent era. On the other hand, Jamie Olis may have been the earliest big loser.

Martha Stewart lost, but at least never lost her business enterprise. Frank Quattrone also lost, but then he won, although I suspect that he believes that he lost overall.

Subsequently, Theodore Sihpol won while Bill Fuhs and his family lost a year of his life before he won, too. But he and his family will never get that year back.

And no one lost bigger than Jeff Skilling.

Meanwhile, although mainstream media darlings Steve Jobs and Warren Buffett won, several of Buffett's associates did not fare as well. Neither did Greg Reyes.

And who knows about those Lehman Brothers executives -- they may be winners, after all? I mean, everyone was doing it, right? But you never know for sure.

Finally, who possibly can justify what Bill Furst has been through?

Just as with a gambling lottery, there is no rhyme or reason as to who wins or loses in the criminalization-of-business lottery. But in this lottery -- which does little or nothing to deter the true business criminals of the world -- the losers and their families give up much more than merely money.

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (1) |

April 29, 2010

Why do we do this to ourselves?

As we ponder how one governmental agency -- which couldn't uncover Bernie Madoff or Stanford Financial's sketchy affairs despite being told about them -- is going to make a fraud case against Goldman Sachs on a transaction between sophisticated investors who knew what was going on, let's check out another government agency's bumbling decision-making:

More than thirty organizations across the political spectrum have filed a formal petition with the Department of Homeland Security, urging the federal agency to suspend the airport body scanner program.

Leading security expert Bruce Schneier stated, "Body scanners are one more example of security theater.

Last year, the organizations asked Secretary Janet Napolitano to give the public an opportunity to comment on the proposal to expand the body scanner program. Secretary Napolitano rejected the request. Since that time, evidence has emerged that the privacy safeguards do not work and that the devices are not very effective.

"At this point, there is no question that the body scanner program should be shut down. This is the worst type of government boondoggle -- expensive, ineffective, and offensive to Constitutional rights and deeply held religious beliefs," said Marc Rotenberg, President of EPIC.

And if Bruce Schneier's opinion isn't good enough for you, take heed of what a leading security expert who is constantly on the front lines says about the scanners:

A leading Israeli airport security expert says the Canadian government has wasted millions of dollars to install "useless" imaging machines at airports across the country.

"I don't know why everybody is running to buy these expensive and useless machines. I can overcome the body scanners with enough explosives to bring down a Boeing 747," Rafi Sela told parliamentarians probing the state of aviation safety in Canada.

"That's why we haven't put them in our airport," Sela said, referring to Tel Aviv's Ben Gurion International Airport, which has some of the toughest security in the world.

Sela, former chief security officer of the Israel Airport Authority and a 30-year veteran in airport security and defence technology, helped design the security at Ben Gurion.

Despite what the experts say, he wasteful airport security process that we have allowed the Transportation Security Administration to impose on us continues unabated at a substantial direct cost and an even greater indirect one.

It's bad enough that the TSA's procedures do virtually nothing to discourage serious terrorist threats. What's worse is that the inspection process is really just "security theater" that makes only a few naive travelers feel safer about airline travel.

And if all that weren't bad enough, the worst news is that once a governmental "safeguard" such as the TSA procedures are adopted, Congress has no interest in dismantling it even when it's clear that process is ineffective, expensive and obtrusive to citizens. Stated simply, the TSA has become a jobs program for thousands of registered voters.

James Fallows sums up the absurdity of the situation well:

TSA + defense contractor + security theater vs Israeli expert + Schneier + common sense.

Hmmm, I don't know what to believe.

Posted by Tom at 12:01 AM | Comments (4) |

April 25, 2010

Top Ten Goldman Sachs Excuses

Posted by Tom at 12:01 AM | Comments (1) |

April 19, 2010

Goldman in the crosshairs

The inevitable SEC action against Goldman Sachs took the financial system by storm on Friday, so the weekend has been a feast of blogosphere analysis on the implications of the lawsuit. The best way to follow daily developments in the case is over at Clusterstock where Joe Weisenthal and Henry Blodget have their fingers on the blogosphere�s pulse in regard to the SEC lawsuit.

The best analysis of the lawsuit that I�ve read in the blogosphere to date comes from Larry Ribstein, Erik Gerding and UH�s Craig Pirrong. Read their posts and you will have a good understanding of the issues involved in the case.

Frankly, the SEC action against Goldman looks a lot more about public relations than effective regulation. As Blodget pointed out on Friday morning, the timing of the filing pushed the highly embarrassing SEC Inspector�s report on the SEC�s bungling of the investigation into Stanford Financial off the public�s radar screen. One would hope that the SEC�s due diligence in regard to its action against Goldman is better than its research into Stanford Financial, which was widely known in Houston financial and legal circles to be a sketchy outfit for over a decade before it blew up last year.

The key to the SEC's case is that Goldman apparently did not disclose to ACA nor IKB and ABN knew that uber-mortgage short specialist John Paulson was placing bets against the underlying securities upon which the synthetic CDO was based at the same time as Paulson was helping Goldman and ACA choose the underlying securities.

Thus, the theory goes, Paulson presumably had an incentive to enhance the failure of the securities. Accordingly, the SEC contends that Goldman and Paulson structured the deal to lose, that Goldman knew the investors wouldn't buy if they knew that, and that Goldman didn't disclose those details because it was making fees all over the place.

My sense is that the case is far from a slam dunk (see also here and here) for the SEC, but it probably doesn't make any difference. If Goldman defends itself and loses, then the trial penalty is that private civil lawsuits by other investors will use the judgment in favor of the SEC to establish liability against Goldman (interestingly, Goldman elected not to disclose its receipt of the Wells Notices related to the SEC lawsuit). Although Goldman could manage the payment of an SEC fine, damages in those civil lawsuits could seriously harm the firm.

Thus, my sense is that Goldman has to settle with the SEC, and probably for a good chunk of change to make the SEC look good. That will likely suit Goldman just fine because it would continue to distract the public from the far larger travesty, which was the way in which the federal government bailed Goldman out from its massive risk of loss in regard to AIG.

From a policy standpoint, the SEC action is a part of the Obama Administration's public relations campaign to promote federal regulation of the derivatives markets, a point that Professor Ribstein makes in this post:

In other words, the SEC, under pressure to come up with something on the eve of Congress's final push toward financial regulation comes with a case that the complaint makes clear is much more about the creation of systemic risk than about securities fraud.

This reflects, in part, the new Wall Street, more than three quarters of a century after the securities laws were enacted. Financial regulation is now much more about sophisticated market intermediaries than about individual investors who need somebody to ensure they have the truth about securities.

This is not to say that securities fraud is irrelevant. However, the SEC has struggled on that front � the Bank of America settlement, Madoff, Stanford.

And so now we are left with . . . Goldman.

Inasmuch as such regulation will allow federal regulators to exercise the same judgment in regard to derivatives regulation that it applied to regulating the likes of Stanford Financial and Bernie Madoff, count me as decidedly unconvinced that this development constitutes progress.

However, one positive aspect about the SEC�s complaint is that it provides a stark reminder to investors of the risk of doing business with the likes of Goldman. As Arnold Kling has been saying for years, perhaps it wouldn�t be such a bad thing if investors didn�t rely so much on the chauffered investment bankers of Wall Street and their friends in government.

Posted by Tom at 12:01 AM | Comments (1) |

April 18, 2010

Our troubling tax system

Another first rate Cato Institute video on the horrific cost of our overly complicated taxation system.

Posted by Tom at 12:01 AM | Comments (0) |

April 15, 2010

Milton Friedman on poverty

Posted by Tom at 12:01 AM | Comments (3) |

April 6, 2010

The NFL’s big risk

This post from awhile back noted the high risks that NFL football players take relative to their compensation.

Well, it looks as if that risk may be coming home to roost:

California�s workers� compensation system provides a unique, and relatively unknown, haven for retired professional athletes among the 50 states, allowing hundreds of long-retired veterans each year to file claims for injuries sustained decades before. Players need not have played for California teams or be residents of the state; they had to participate in just one game in the state to be eligible to receive lifetime medical care for their injuries from the teams and their insurance carriers.

About 700 former N.F.L. players are pursuing cases in California, according to state records, with most of them in line to receive routine lump-sum settlements of about $100,000 to $200,000. This virtual assembly line has until now focused on orthopedic injuries, with torn shoulders and ravaged knees obvious casualties of the players� former workplace.

Given the dozens and perhaps hundreds of players who could file similar claims, experts in the California system said N.F.L. teams and their insurers could be facing liability of $100 million or more. They identified a wide spectrum of possible effects: these costs could merely represent a financial nuisance for a league that recorded $8.5 billion in revenue last year, or, if insurance costs rise drastically because of such claims, the N.F.L. could be forced to alter its rules to reduce head trauma. Officials already are considering decreased contact in practice and forbidding linemen from using the three-point stance.

Perhaps the NFL�s undervaluing of this risk is a product of a false sense of security that the NFL owners have nurtured from a collective bargaining process that has shielded the league from most anti-trust liabilities over the years. But the NFL owners better pay attention to this development. Plaintiffs� lawyers will have a field day against that group.

Posted by Tom at 12:01 AM | Comments (1) |

March 31, 2010

The genius of Southwest Airlines

Southwest Airlines has been a favorite of this blog over the years because of the company�s intelligent approach to business, often while running counter to the prevailing airline industry �wisdom.�

Thus, as other airlines discourage customers from checking baggage by charging baggage fees, Southwest encourages customers to check baggage by not charging any such fees. The reason? Because, as Eric Joiner explains, it helps Southwest make money:

Southwest Airlines flies a network within the United States that uses basically one airplane. The Boeing 737. For this reason, baggage capacity is fairly consistent with passenger load. Also anyone making a connection is likely to make a connection to another SWA 737, so baggage load factor remains fairly consistent across the network. This has major advantages.

By inspiring customers to check bags, aircraft can be loaded and unloaded much faster than if passengers carry bags onto the main deck and put them in the overhead bin. Anyone who has been on a fully loaded jet recently knows it can take 15-20 minutes just to get the passengers off the plane. The bigger the jet, the longer this takes. Time spent on the ground means time not in the air. Airlines only make money when the jet is flying. By encouraging passengers to check bags and by operating a homogeneous network, SWA can turn flights faster and thus create more profit for the airline.  

What you are actually witnessing is an extension of Southwest�s fuel strategy. SWA has always done a brilliant job of fuel cost hedging.  That is buying futures in jet fuel against probable market cost at time of consumption.  Turning aircraft faster means more revenue for the fuel already purchased. Consider this a post hedge leverage on the gas in the tank.

Isn�t it interesting that Congress periodically attempts to stifle precisely this type of innovative wealth and job creation?

Posted by Tom at 12:01 AM | Comments (3) |

March 30, 2010

The criminalization-of-business lottery continues

So, after having been tried and convicted once in 2007, and having that conviction subsequently overturned because of prosecutorial misconduct, former Brocade Communications CEO executive Greg Reyes was convicted again last week on nine counts of securities fraud and making false statements in connection with his involvement in backdating stock options.

Alas, the criminalization-of-business lottery continues in regard to another business practice that simply should not be a crime. Frankly, Reyes� real crime appears to be that he is not Steve Jobs.

Unfortunately, the publicity surrounding this recent disclosure � which took place during Reyes� trial � probably didn�t help Reyes much.

It probably won�t help Robert Furst, either, who is the next unlucky executive who will be put on the merry-go-round of an utterly baseless and random prosecution.

Meanwhile, the different trajectories of these two lives really makes one wonder about the purpose of all this?

Back in 2006, Larry Ribstein was the first blogger to challenge the backdating prosecutions. The utter vacuity of those prosecutions proved that his skepticism was correct. I cannot improve upon Professor Ribstein�s characterization of the true scandal relating to the backdating of stock options:

�The real backdating scandal is not the one that has been generally reported. It is, instead, the woeful inadequacy of mainstream business reporting compounded by prosecutorial misconduct.�

A truly civil society would find a better way.

Posted by Tom at 12:01 AM | Comments (0) |

March 24, 2010

Longhorns Inc.

More than a few tongues are wagging around Texas Longhorn athletic circles this week over this blistering Texas Observer op-ed on the UT football program authored by UT professor Tom Palaima, who just happens to serve on the UT Faculty Advisory Committee on Budgets and is UT�s representative on the Big 12 steering committee of the Coalition on Intercollegiate Athletics. Here�s a flavor of the article:

The NCAA program at the University of Texas at Austin generated $138 million in revenue last year, $87 million from football. Yet its profit margin is less than $2 million. The program�s cumulative debt and debt service are in the high-risk neighborhood.

Longhorns Inc. has wrapped its tentacles around the now-hemorrhaging academic budget. The athletics department gave a $2 million raise to head football coach Mack Brown as colleges across the university are laying off staff. In foreign languages alone, $1.6 million was cut. The head of the student union recently announced the closure of the Cactus Caf�, a historic music venue, to save just $66,000 over two years.

Worse, the university has ceded trademark and royalty revenues. Longhorns Inc. keeps 90 percent of this income, roughly $10.6 million last year. The yearly debt payment on building bonds for the nearly $300 million in stadium expansions since 1998 is $15 million. The debt run up by the athletics department has risen from $64.4 million in 2004-05 to a staggering $222.5 million in 2008-09.

Unfortunately, Palaima main criticism is how well the UT athletic department and its personnel are doing financially in comparison to the UT academics, whose average salary has increased by �only� 30 percent over the past 20 years or so.

Somehow, however, Palaima utterly misses the most corrupt aspect of big-time intercollegiate athletics. That is, the perverse and discriminatory regulatory scheme that restricts compensation to the players � mostly young black men � whose talent actually generates most of the wealth for the athletic departments.

As I�ve noted many times, big-time college football and basketball is an entertaining form of corruption. Too bad that someone as bright as Professor Palaima fails to understand the true nature of that corruption.

By the way, below is a video of a lively debate between Professor Palaima and longtime UT Law professor Lino Graglia over college football in which Palaima is actually the defender of the entreprise (a colleague asked Palaima �DeLoss Dodds must have given you priority seating at [Darrell K. Royal-Memorial Stadium]�. The transcript of the debate is here.

Posted by Tom at 12:01 AM | Comments (2) |

March 23, 2010

Thoughts on health care finance reform

Inasmuch as America�s fractured health care finance system has been a common topic on this blog since early 2004, many friends and readers have asked my thoughts about the health care reform legislation that was passed yesterday. So here goes.

The legislation is fundamentally flawed because it imprudently foists a top-down reorganization plan on something as complex and disparate as financing health care. But frankly, I have no idea whether it will result in a worse finance system than the current one, which is pretty bad.

My biggest criticism with both the current system and the one contemplated by Obamacare is that the patient is not the customer, at least as it relates to non-catastrophic illness and injury. Without cost control � and customer decision-making is the most efficient one available - neither the current system nor Obamacare will be able to maintain delivery of high-quality care to an increasingly aging population.

However, the reality is that we now have two solid generations of Americans now who enjoy having someone else pay for their health care. So, it�s unrealistic to think that such a societal shift is going to change anytime soon. But it�s still important to understand how we got to this point.

Employer-based health insurance became popular during World War II because it was initially exempted from gross income as a way to circumvent wartime wage and price controls. After the war, marginal income tax rates were high and individual medical expenses were tax deductible, so at least some rational incentives were returned to the medical marketplace.

But all this changed in 1986 when the Reagan Administration made concessions to achieve bipartisan tax reform. Individual medical expenses were no longer deductible until they reached 7.5% of gross income, which virtually eliminated individual incentives in the medical marketplace. Not surprisingly, everyone was incentivized after tax reform to move all medical expenses to third-party-payor health insurance. As a result, individual out-of-pocket expenses in the health care market dropped from 22% in 1985 to less than than 10% of the market now.

So, in essence, the Reagan Administration horse-traded personal tax deductibility of medical expenses away, but figured that was acceptable because at least employer health insurance remained tax-free benefit. I�m sure if we could ask him now, President Reagan would tell you that he expected a future Congress would fix such perverse incentives after the dust settled on the benefits of tax reform. But alas, that never happened.

What happens now? The only certainly is that special interests will be descending upon Washington in droves to do their bidding over the transfers of wealth that will occur under the new legislation. At least it will be entertaining to watch who wins and loses.

But there are two big points that everyone should remember as we embark on this new world of health care finance.

First, the Obama Administration�s rationalization of future cuts in Medicare spending as a funding source for the health care legislation is utterly disingenuous, as Arnold Kling artfully explains:

Imagine that your crazy uncle Fred had bought a dozen cars on credit. As a result, he faces car payments far in excess of what he can afford. He comes to you and says he has a plan that in a couple of years will reduce his car payments by a few thousand dollars. "Now I have the money for a down payment on a boat!" he exclaims, as he runs off to the boat dealer.

The equivalent is for Congress to treat future cuts in Medicare as if they were a newfound source of wealth to be tapped. Once they adopt this precedent, they can increase spending on whatever they want, in unlimited amounts, while claiming deficit neutrality. Future Medicare spending is so high that you can always come up with cuts, as long as they deferred.

Second, as Greg Mankiw notes, projected Medicare cuts in payment rates for physician services portend the rationing of medical services that the promoters of the current legislation contend won�t occur. Because few consumers actually pay for their health care, most folks don�t realize that Medicare and Medicaid payment rates for physician services have already been cut by around 30% since the late 1990�s. That has led many doctors to limit substantially the number of Medicare and Medicaid patients who they are willing to treat in their practices. In my view, that trend is likely to continue under the new legislation. Who will tend to the medical needs of consumers who elect to rely on such insurance in the future?

Supporters of Obamacare generally argue that the legislation offers more equality through expanded insurance and redistribution of benefits. But the wealthy will always find ways to get around the rationing and other restrictions of a government-run health care system. On the other hand, the poor will have no choice but to accept the government health care, which is unlikely to be as high a quality as what the rich folks obtain from their private doctors. Accordingly, although the distribution of health care may be a bit more equal in the short term, I'm not sure that means more equality in health care in the long run.

Which leads me to this question: How long will it be before the federal government requires physicians, as a condition to being allowed to engage in private practice, to accept a certain number of patients under government-sponsored insurance plans that limit payments to the physicians far below what the physicians would otherwise accept?

Posted by Tom at 12:01 AM | Comments (12) |

March 22, 2010

The bad Metro bet

Following on this post from last week, there were a couple of good pieces from over weekend on the cascading boondoggle that is Houston�s Metropolitan Transit Authority.

In this post, the always-insightful Tory Gattis comments on Randal O�Toole�s Wall Street Journal op-ed from over the weekend in which O�Toole focuses on the short-sighted nature of huge investment in light rail systems. At a time of fast technological innovation, why should a community place a substantial amount of its chips on an increasingly obsolescent form of mass transit such as light rail?

Meanwhile, Bill King followed his fine blog post from last week with this devastating Sunday Chronicle op-ed in which he disassembles each of the primary myths that Metro supporters use when defending the light rail system. In particular, King explains why the 2003 referendum is not a reasonable justification for what Metro is proposing now with regard to its light rail system:

The 2003 referendum had three elements: (1) a $1.2 billion LRT system; (2) a roughly 50 percent increase in bus service; and (3) initiating a plan for commuter rail.

Metro has completely abandoned the bus expansion: We have fewer buses and bus riders today than we did in 2003. It also has done absolutely nothing to further the development of any commuter rail lines and has instead gotten in the way of other groups like Harris County when they have tried to initiate some action. The voters in 2003 did not approve just a light rail plan; they approved a comprehensive, multimodal system. Metro, for its own reasons, has abandoned what the voters approved in favor of its own grandiose vision.

Additionally, it should be noted that the voters specifically restricted Metro to borrowing $640 million to build the light rail system. Metro now plans to subvert that limitation by entering into a sale/lease-back arrangement with a separate subsidiary and actually borrow more than four times what the voters approved. Metro is always quick to invoke the moral authority of the 2003 referendum but casually ignores its inconvenient restrictions.

Meanwhile, the Chronicle editorial board continues to live in a rather odd state of denial with regard to Metro. In this vacuous op-ed, the Chron attempts to put a cheery face on Mayor Parker�s appointment of several new members to the Metro board (one is actually �a regular Metro rider� � how about that?!) and her negotiations with federal officials regarding funding of further light rail lines.

Without any financial analysis whatsoever, the Chron asserts that Mayor Parker is moving forward with a �full build-out of light rail in a fiscally responsible manner.� But even a cursory review of the data proves just the opposite.

As Peter Gordon has long maintained, citizens should require their leaders to answer the following basic questions before allowing them to obligate citizens to funding boondoggles such as light rail: 1) At what cost?, 2) Compared to what? and 3) How do you know?

The Chronicle editorial board is taking a pass on asking Metro�s leaders those questions. Thankfully, Bill King and Tory Gattis are not.

Posted by Tom at 12:01 AM | Comments (0) |

March 17, 2010

The Metro Train Wreck

The Metropolitan Transit Authority has been in the news recently mostly because of a good, old-fashioned document-shredding scandal and yet another spectacular crash.

But the more important issue facing Houstonians is that Metro is preparing to force large swaths of the community � including the key Uptown area near the Galleria -- to incur the enormous cost of enduring construction of its inefficient and impractical rail lines.

Bill King has spent a considerable amount of his time over the past several years studying Metro and Houston�s transit problems. In this devastating post, King finds that Metro is close to barreling completely out of any semblance of fiscal control:

There could hardly be a more fitting image for the close of the current Metro administration than the recent photographs for a wrecked Metro buses in front of Metro's headquarters after having been broad-sided by Metro's Main Street light rail. The last six years are likely to be remembered as the most ruinous time for public transportation in Houston's history as Metro has pursued a single-minded obsession to build its version of an at-grade rail system regardless of the cost, both in financial terms and in the degradation of the bus system on which over 100,000 Houstonians rely daily. Fortunately, Mayor Parker has ordered top-to-bottom review of the agency. Here is what that review is likely to find.

Decline in Ridership. Since 2004, Houston population has grown by over 10% from just over 2 million to 2.25 million. At the same time gas prices rose 47% from $1.81 per gallon to $2.67 per gallon. These two factors should have virtually guaranteed an increase in transit. However, exactly the opposite has occurred as bus boardings dropped almost 24% from 88 million in 2004 to 67 million in 2009. Instead of increasing bus service by 50% as it promised the voters in the 2003 referendum, Metro has slashed bus routes and increased fares by over 50%. Today Metro actually operates 225 fewer buses than it did in 2003. An outside performance audit in 2008 found that on-time performance fell by 29% from 2004 to 2008.

Financial Disaster. Since 2003, Metro's sales tax revenues have increased by 43%, rising from $357 million to $512 million. At the same time, its fare revenue increased by 41% from $42 million to $60 million by charging an ever dwindling ridership more. Yet, Metro is in the worst financial shape in recent history. At year end 2003 Metro's current assets exceeded its current liabilities by $125 million. The budget just adopted by the Metro board projects that it will have current accounts deficit of $165 million by the end of this fiscal year, a stunning loss of nearly $300 million in just five years. Over the same period, Metro's debt has swelled by nearly 50% from $546 million to $816 million. [.  .  .]

In the meantime, the cost of the [Metro�s Light Rail Transit lines] has risen from the $1.2 billion originally estimated to something well in excess of $3 billion. Metro is seeking to borrow $2.6 billion to build the LRT, over four times what it promised the voters would be the limit in the 2003 referendum. Originally, Metro assured voters that it could build the LRT without tapping the mobility payments that are so critical to the Houston and the other member cities. Metro's projections now show that it can only afford the LRT if those payments are terminated in 2014. [.  .  .]

In 2003, after a spirited public debate, this community approved, by a narrow margin, a consensus plan to enhance public transportation with a multi-modal approach. Part of that bargain was a limited experiment with a light rail system. The voters specifically limited the resources that Metro could devote to the light rail for fear that the cost might undermine the solid, dependable bus service that existed at that time. Metro's leadership has shredded that contract with the voters in favor of its own grandiose vision of transit that has little to do actually solving Houston's mobility problems. In the meantime, traffic congestion continues to get worse and working families that rely on public transportation to get their jobs everyday find riding Metro a more difficult and more expensive proposition.

Read King�s entire post. Metro�s defenders typically rely on the 2003 referendum as the primary basis for their continued support of such wasteful spending. But the problem with such referendums is that they ask voters to approve large public ventures such as Metro in a vacuum while ignoring Peter Gordon's three elegantly simple questions regarding economic choices:

1) At what cost?

2) Compared to what? and

3) How do you know?

For example, assume for a moment that voters were informed of the fact that the average urban freeway lane costs about $10 million per mile and that the average light rail line costs over $50 million per mile while carrying less than one-fifth as many people as the freeway lane. And these are only average figures.

Moreover, let's assume that voters were informed that the expenditure of a billion or so of public money on expanding a lightly-used light rail system has real consequences, such as leaving inadequate funds to make improvements to Houston's infrastructure that would dramatically decrease the risk of death and property damage from flooding. Or whether the billion or so being flushed down the light rail drain would be better used to fix various area traffic "hotspots" where accidents or bottlenecks occur with high frequency.

No one knows for sure, but my bet is that voting results would be dramatically different if the foregoing costs and alternatives were included as a part of the referendum.

Unfortunately, the relatively small groups that benefit from these urban boondoggles have a vested interest in keeping that threshold issue from ever being re-examined. The economic benefit of light rail is highly concentrated in only a few interest groups, such as political representatives of minority communities who tout the political accomplishment of shiny toy rail lines while ignoring their constituents need for more effective mass transit; environmental groups striving for political influence; construction-related firms that feed at the trough of Metro's poor investment decisions; and private real estate developers who enrich themselves through the increase in their property values along the rail line. As Professor Gordon wryly-noted in another post: "It adds up to a winning coalition."

Unfortunately, once such coalitions are successful in establishing a governmental policy subsidizing such boondoggles, it is much more difficult to end the public subsidy of the boondoggle than to start it in the first place.

None of these above-stated reasons for mass transit appeal to the vast majority of the electorate, so this amalgamation of interest groups continues to disguise their true interests behind amorphous claims that the uneconomic rail lines reduce traffic congestion (they do not), curb air pollution (they do not), or improve the quality of life (at least debatable).

How do these interest groups get away with this? The costs of such systems are widely dispersed among the local population of an area such as Houston, so the many who stand to lose will lose only a little while the few who stand to gain will gain a lot. As a result, these small interest groups recognize that it is usually not worth the relatively small cost per taxpayer for most citizens to spend any substantial amount of time or money lobbying or simply taking the time to vote against an uneconomic rail system.

Metro's rail system is a bad virus that has infected Houston. The cost of treating this civic virus is growing larger each month. Without immediate re-examination of Metro's light rail plan, the increasing costs of this plan risk turning this currently manageable problem into a major civic fiscal crisis that could negatively affect the Houston area's growth and prosperity.

As Bill King exhibits, real leadership involves recognizing that risk and addressing it, not indulging it.

Posted by Tom at 12:01 AM | Comments (2) |

March 16, 2010

My Lehman Bullshit

Mike over at the Crime and Federalism blog (a good blog, by the way) thinks my explanation yesterday of Lehman Brothers� controversial repo 105 transactions is bullshit.

Well, I�m as full of bullshit as anyone, but my sense is that Mike�s analysis is flawed. That�s not to say that the folks involved in reporting Lehman�s earnings to the marketplace after those repo 105 transactions didn�t commit fraud. I don�t know enough about the facts to know one way or the other.

The main point of my post is that a whole bunch of of executives, accountants, auditors, counterparties and governmental officials were swirling around Lehman at the time of these repo 105 transactions. As a result, the responsibility for any fraud is better allocated among the responsible parties in the civil justice system than in the criminal justice system, where guilt is adjudicated with a sledgehammer when a scalpel is more appropriate.

But one of the interesting aspects about Mike�s post is that he is very sure that he understands that Lehman committed fraud. So, let�s take a look at his example of what he thinks happened with regard to Lehman and the repo 105 transactions (my observations are in italics below each of his statements):

I ask you to invest $100,000 in my new business. You ask me how much money I have in my business account. I only have $5,000, but do not tell you this.

Okay, as my prior post noted, I concede that Lehman may have misrepresented its true liquidity position through the repo 105 deals.

I can sell everything the business owns (including all of our inventory) to a pawn shop for $100,000.

If Mike can sell all the assets of the business to a pawn shop for $100,000, then the business owns much more than $100,000 in assets. Pawn shops - much like the financial institutions with whom Lehman was dealing � do not engage in repo 105 transactions unless they are darn sure that they can liquidate the assets that they purchase for more than they paid if the seller breaches his obligation to repurchase the assets.

The pawn shop will sell me everything back for $105,000 if I come up with the money within 48 hours.  They won't even take possession of the property if I pay them within 48 hours.

I do not know of any pawn shop � or financial institution for that matter � that would be willing to leave property that they purchased in the hands of a financially-troubled seller, even for just 48 hours. Moreover, my understanding of the repo 105 transactions is that Lehman was not obligated to repurchase the asset for the sale price plus 5%. My understanding is that the �105� in repo 105 relates to the fact that financial institutions require property at least worth 105% of the purchase price that the financial institution pays the seller for the asset. I�m sure that Lehman�s counterparties required a steep fee for engaging in the repo 105 sales, but not 5% of the purchase price.

I make the "sale" to the pawn shop. I show you a copy of my bank statement. You can see that I have $105,000 cash in my bank account. I'm, in other words, liquid 100 grand. You loan me $100,000.

Here is where Mike is confused. Prior to taking the $100,000 loan, his company�s balance sheet actually looks a bit worse because of his sale to the pawn shop. The company has sold assets worth more than $100,000 in order to increase its liquidity to $105,000. No rational investor would make a $100,000 unsecured loan to a company with assets of only $105,000 cash that the investor would not have been willing to make when the company had $5,000 cash and over a $100,000 in non-liquid assets. But , let�s play along with Mike to get to his main point. After the loan, his company now has $205,000 in cash with a $100,000 liability.

I buy my stuff back for $105,000. I now have, thanks to you and some quick accounting fraud, $95,000.

No, that�s only part of it. The company now has repurchased its assets that are worth over $100,000, it has cash of $100,000 and a $100,000 liability. So, the company�s balance sheet is pretty much the same had the investor made his loan when the company only had $5,000 cash and over $100,000 of non-liquid assets. The only difference is that the investor feels deceived because he would not have made the loan under those circumstances.

So, maybe Mike�s investor in the example above has a good fraud case against the company (I�m not sure that�s the best way for the investor to recover his loan, but that�s another issue). But maybe not, too. And the situation that Lehman faced was far more complex than Mike�s hypothetical and involved a large number of well-intentioned people who were attempting to find any loophole available to save Lehman.

And that�s no bullshit.

Posted by Tom at 12:01 AM | Comments (0) |

March 15, 2010

The Enronization of Lehman Brothers

The big news in the business world at the end of last week and over the weekend was the publication of the examiner's report in the Lehman Brothers bankruptcy case.

The mainstream media jumped all over the report as a precursor to criminal indictments of former Lehman executives because of allegations in the report (that's all they are at this point) that Lehman used repo 105 transactions at the end of several quarters to make its balance sheet look more attractive than it really was. Fancy that, executives trying to stem a run on a trust-based business!

Despite the gathering MSM lynch mob, the truth is that the examiner's report is shaky grounds, at best, for criminal indictments against former Lehman executives. As folks who are experienced in bankruptcy realize -- but those who aren't don't -- an examiner's report is hardly an objective analysis of a debtor's affairs. Bankruptcy examiners are highly incentivized to recommend as many legal actions against the debtor's insiders and counterparties as possible. The fruits of those legal actions inure to the benefit of the bankruptcy debtor's creditors, which is really the only constituency in most bankruptcy cases that really can effectively challenge an examiner's compensation. As a result, feather nesting is not an unusual tactic of bankruptcy examiners.

Moreover, examiner's reports in bankruptcy cases are far from dispositive. I haven't read the Lehman examiner's report yet, but I'm skeptical of the MSM's initial rave reviews. The Enron examiner's report met with similar early favorable reaction, but it turned out to be chock full of plain factual errors and dubious conclusions based on those errors.

For example, the MSM's reporting of the examiner's conclusions regarding the timing of the repo 105 transactions doesn't make sense to me. As I understand those transactions, they improved Lehman's balance sheet by increasing its liquidity position at the end of several quarters through converting non-liquid assets to cash. When Lehman repurchased the assets after the date of the financial statement, the balance sheet didn't change much except for showing less liquidity because the repurchased asset - which went back on the balance sheet after the repurchase - was probably worth more than the liquidity used to repurchase it (I seriously doubt that the sharpies who were dealing with Lehman as it was going down in flames were consenting to using Lehman's trash assets in the repo deals).

At any rate, Peter Henning and Larry Ribstein have both done a good job of analyzing the main problem facing the Lehman insiders from a criminal standpoint. It is different and potentially more troublesome than the honest services wire fraud theory that was the basis of most Enron-related prosecutions. That is, the Lehman executives are subject to the provisions in the Sarbanes-Oxley legislation enacted after Enron's bankruptcy that impose criminal liability on executives who falsely certify the (i) accuracy of the financial statements and (ii) absence of deficiencies in internal controls regarding the preparation of the financial statements.

By the way, although Henning's analysis is quite good, his analogy of the repo 105 transactions to the Nigerian Barge transaction in the Enron-related criminal prosecutions is a stretch. The Nigerian Barge transaction was a relatively small deal in which Enron -- about an $80 billion market cap company at the time -- sold its interest in the Nigerian barges to Merrill Lynch to make a $12 million profit at the end of the particular quarter. On the other hand, the examiner alleges that Lehman was using repo 105 transactions to raise $35 - $50 billion of liquidity at the end of several quarters. Big difference.

Also, flying beneath the radar (as usual) is current Treasury Secretary Timothy Geithner and former Treasury Secretary Hank Paulson's role in all of this. As closely as Geithner (as head of the New York Federal Reserve) and Paulson (as Treasury Secretary) were monitoring Lehman during much of this time, it strains credulity that Geithner and Paulson didn't have at least some idea of what Lehman was doing to make its balance sheet as attractive as possible. Both Geithner and Paulson were intimately involved in attempting to broker a Bear Stearns-type bailout of Lehman.

So, if Geithner and Paulson knew what was going on, then how on earth is the federal government going to single out Richard Fuld and other former Lehman executives for criminal conduct?

Which brings us to the real lesson of all this -- that is, the inherently fragile nature of a trust-based business (related posts here) and the misguided nature of the notion that more governmental regulation will somehow protect investors from the next bust of such a business.

Larry Ribstein has been insightfully pointing out for years that more regulation of those businesses will not prevent the next meltdown, just as the more stringent regulations added under Sarbanes-Oxley after Enron's collapse did not prevent Lehman Brothers from failing. More responsive forms of business ownership certainly are a hedge to the inherent risk of investment in a trust-based business. But also helpful would be better investor understanding of the wisdom of hedging that risk and the importance of short sellers in providing information on troubled companies to the marketplace.

And as for criminal prosecutions? Unless there is evidence beyond a reasonable doubt of a crime, far better to allow the civil justice system allocate responsibility for Lehman's failure among the multitude of potentially responsible parties. Professor Ribstein nails this point in the final paragraph of his post:

The lesson here is that pursuing high-profile criminal prosecutions in Lehman after the problems with such prosecutions in these situations proved so manifest in Enron would prove that after a decade of hugely costly trials and a massive new law that was supposed to change everything, we still haven't learned a thing about the unsuitability of criminal liability for these kinds of cases.

Finally, Lawrence Kudlow and John Carney have an excellent seven-minute discussion below of the failure of governmental regulation in regard to Lehman:

Posted by Tom at 12:01 AM | Comments (4) |

March 9, 2010

The National Enquirer one ups the MSM

The Washington Post�s Paul Farhi makes the interesting point in this American Journalism Review op-ed that the biggest scandal in regard to the Tiger Woods affair may be that the National Enquirer tabloid newspaper did a better job of following proper journalistic procedures in breaking the scandal than much of the mainstream media did in follow-up reporting on it:

[National Enquirer Editor] Barry Levine finds himself surprised, appalled and somewhat amused by the way much of the mainstream media handled the Woods scandal. The Enquirer's original story, he notes, took months of reporting. It involved many hours of interviews, polygraph tests, stakeouts, document dives and travel. It was checked and re-checked.

But many members of the MSM, he notes, exercised no such care in reporting subsequent aspects of the story. "It would have taken us a couple of years to properly investigate each of these women's claims as thoroughly as we did the first" woman's, Levine says. "The stories were all over the place. There was just some outrageous coverage."

That's right. The editor of the National Enquirer doesn't think much of the way the "respectable" media covered Tiger Woods. Anyone paying close attention would concur that he has a point. It might be that the biggest scandal to come out of the Woods affair wasn't the one about a golfer. It was the one about the news media.

Meanwhile, The New York Times � that paragon of the mainstream media � is currently taking it on the chin around the blogosphere because one of its leading business reporters essentially doesn�t know what she is talking about in this article from over the weekend.

The blogosphere exposed the vacuous nature of how much of the mainstream media addressed complex issues. Now the tabloids are doing a better quality of reporting than many MSM publications on certain major stories. Will the mainstream media have any credibility or meaningful stature left when the reformation of how we process information is complete?

Posted by Tom at 12:01 AM | Comments (0) |

March 7, 2010

The Last Four Minutes of Air France Flight 447

I've been meaning to pass along for awhile  this superb Gearld Traufette/Spiegel Online article on the continuing investigation into last summer's horrific crash of Air France 447 into the Atlantic Ocean (earlier post here).

Although the black box still has not been recovered (and quite likely won't be), investigators are becoming more confident that they understand what happened, including the following interesting theory:

According to this scenario, the pilots would have been forced to watch helplessly as their plane lost its lift. That theory is supported by the fact that the airplane remained intact to the very end. Given all the turbulence, it is therefore possible that the passengers remained oblivious to what was happening. After all, the oxygen masks that have been recovered had not dropped down from the ceiling because of a loss of pressure. What's more, the stewardesses weren't sitting on their emergency seats, and the lifejackets remained untouched. "There is no evidence whatsoever that the passengers in the cabin had been prepared for an emergency landing," says BEA boss Jean-Paul Troadec.

Read the entire article, including this informative graphic.

Posted by Tom at 12:01 AM | Comments (0) |

March 5, 2010

The NBA Bubble

Looking for the next bubble to burst?

How about the National Basketball Association, where the local Houston Rockets play in what has been nicknamed �The Library on LaBranch� because of the lack of fan interest at their home games.

ESPN�s Bill Simmons dissects and then sums up the league�s dilemma well:

.  .  . The current system doesn't fly. The salary cap and luxury threshold ebb and flow with yearly revenue -- so if revenue drops, teams have less to spend -- only there's no ebb and flow with the salaries. When the revenue dips like it did these past two seasons, the owners are screwed.

They arrived at this specific point after salaries ballooned over the past 15 years -- not for superstars, but for complementary players who don't sell tickets, can't carry a franchise, and, in a worst-case scenario, operate as a sunk cost. These players get overpaid for one reason: Most teams throw money around like drunken sailors at a strip joint. When David Stern says, "We're losing $400 million this season," he really means, "We stupidly kept overpaying guys who weren't worth it, and then the economy turned, and now we're screwed."

This isn't about improving the revenue split between players and owners. It's about Andre Iguodala, Emeka Okafor, Elton Brand, Andrei Kirilenko, Tyson Chandler, Larry Hughes, Michael Redd, Corey Maggette and Luol Deng making eight figures a year but being unable to sell tickets, create local buzz or lead a team to anything better than 35 wins.

It's about Jermaine O'Neal making more money this season than Kevin Durant, Russell Westbrook, James Harden, Serge Ibaka, Eric Maynor, Thabo Sefolosha and Jeff Green combined.

It's about Rasheed Wallace -- a guy who quit on his team last season, then showed up for this one with 34Cs and love handles -- roping the Celtics into a $20 million, three-year deal that will cost Boston twice that money in luxury tax penalties.

With at least a dozen or so NBA teams facing serious financial problems, my sense is that the league is facing a radical restructuring whether the players like it or not. Of course, a substantial component of those teams� financial problems is attributable to the transfer of capital that many teams made to players as a result of not needing to rat-hole capital for arenas that local governments naively financed instead.

Sort of makes one re-think this boondoggle, eh?

Posted by Tom at 12:01 AM | Comments (1) |

March 2, 2010

Jeff Skilling Day at SCOTUS

Got to love the response of Sri Srinivasan -- who handled yesterday's oral argument for Jeff Skilling in his appeal to the U.S. Supreme Court -- to the government's contention that a five-hour voir dire of the jury was sufficient in Skilling's trial to rebut the presumption of community prejudice against Skilling.

According to Lyle Denniston, whose account of the argument is the most comprehensive that I've seen, Srinivasan pointed out that the far less complicated criminal trial of Martha Stewart involved six days of juror selection in a case where there was no evidence of "deep-seated passion and prejudice" among jurors.

As Denniston notes, the SCOTUS Justices are usually hard to read during oral argument and the Skilling argument was no different. As Jeffrey Toobin notes in his recent book on the Supreme Court, Supreme Court decisions are often more the product of coalition-building between the Justices than the legal theories.

From reading Denniston's account and from talking with a couple of friends who attended the argument, I'm guessing that the Justices have already decided either to invalidate or dramatically limit the honest-services wire fraud statute (18 U.S.C. 1346), and that much or all of Skilling's conviction will be overturned on that basis. If I'm right on that, then the Justices are now only deciding whether to knock out Skilling's conviction entirely on the District Court's refusal to change venue from Houston or to conduct a thorough voir dire of jurors and leave the honest services issues for the other two pending cases involving the same issue.

But ignored among all the media reports on the Skilling SCOTUS argument is that the Skilling case is far from over even if SCOTUS were to uphold Skilling's conviction. Put on hold pending the outcome of the SCOTUS appeal is the Fifth Circuit's order to U.S. District Judge Sim Lake to re-sentence Skilling because of errors in the calculation of the length of the sentence.

But even more importantly, the Skilling team is awaiting the outcome of the Supreme Court appeal before filing what will certainly be a scalding motion for new trial in the District Court based on pervasive prosecutorial misconduct involved in the Enron Task Force's prosecution of Skilling.

And that could well be more revealing than any Supreme Court argument.

Posted by Tom at 12:01 AM | Comments (1) |

February 23, 2010

Gearing up for the Skilling SCOTUS argument

Oral argument on Jeff Skilling's appeal of his criminal conviction to the United States Supreme Court is next Monday afternoon, so the Skilling legal team warmed up for the occasion by filing the brief below in response to the Department of Justice's brief on the merits.

If you want to read the entire brief, then I recommend downloading it so that you will be have the version bookmarked in Adobe Acrobat that facilitates review.

As noted in the previous post on the DOJ's brief, the DOJ's case against Skilling has shrunk considerably, which is highlighted by the following Skilling reply brief passage on the DOJ's tepid defense of Skilling's conviction for honest services wire fraud under 18 U.S.C. 1346:

The Government's application of its proposed self-dealing category to Skilling's case demonstrates the continued manipulability of the statute under the Government's approach. In Black and Weyhrauch, the Government expressed the view that 1346 prohibits only bribes/kickbacks and self dealing, and that the latter category is implicated only when conflicting financial interests are "undisclosed." [references omitted]. That statement suggested that the Government would concede that Skilling did not commit honest-services fraud, because Skilling's only alleged personal financial interests arose from Enron's linking of his compensation to Enron's stock value, an interest that was fully disclosed.

But the Government nevertheless argues that Skilling committed honest-services fraud. To bring Skilling's case within the statute's compass, the Government creates a third category of honest services fraud, one that involves disclosed personal financial interests. The Government's cursory explanation of Skilling's honest-services liability (GB50) is hardly clear, but it appears to contend that while Skilling's "personal financial interests" were disclosed and generally aligned with Enron's interests, he put those interests in conflict when he took actions pursuant to his own disclosed compensation interest that were allegedly contrary to Enron's.

Accordingly, in this new category, what the defendant apparently fails to disclose is his scheme to put his own compensation interests ahead of his employer's distinct interests. Not only is that standard itself vague on its own terms, but the Government's repeated acknowledgement that Skilling's case has no precedent in pre-McNally case law (GB17, 49) confirms that this special crime is its own new category, created for the first time in the Government's brief in this Court.

It is time for prosecutors to stop making up crimes under this statute. If 1346 is not invalidated altogether, it should be limited to the single category of conduct universally recognized in the case law and hence largely immune from manipulation quid pro quo bribes and kickbacks.

Stated simply, the Enron Task Force prosecuted Skilling for business judgments that he made that turned out badly for Enron viewed through the clarity of hindsight bias. But Skilling didn't steal a dime from Enron and never took a kickback or a bribe. Those latter acts are crimes. Taking business risks that turn out badly is not.

At a time in which the U.S. economy desperately needs risk-takers to generate jobs and create wealth, here's hoping that the Supreme Court understands the difference.

Posted by Tom at 12:01 AM | Comments (3) |

February 17, 2010

Greece and the Enron narrative

The New York Times� Floyd Norris is still having a hard time giving up the tired and largely debunked Enron narrative.

This time, Norris applies the Enron narrative to Greece, which supposedly hid its true financial condition from honest investors through engaging in complex derivative transactions with the ever-present and greedy investment bankers.

There is only big problem with Norris� morality tale. It�s not true.

As University of Houston finance professor Craig Pirrong points out in this blog post that runs rings around Norris and the Times� dubious analysis, what Greece was doing in using swaps engineered by the investment banks to finance its way into the European Monetary Union has been well known since the early part of this decade. Thus, as Professor Pirrong points out, �nobody  .   .   . has any more reason to be shocked about these transactions than Captain Reynaud had to be shocked about gambling going on at Rick�s.�

That includes Floyd Norris and the New York Times.

Posted by Tom at 12:01 AM | Comments (0) |

February 8, 2010

The wisdom of Will

Tax simplification has been a frequent topic on this blog. So, I was enthused to see George Will knock the ball out of the park in describing the U.S. income tax system while addressing the issue in his WaPo Sunday column:

�Today's tax system was shaped by sadists who were trying to be nice: Every wrinkle in the code was put there to benefit this or that interest.�

The proposals that Will addresses would do more for the American economy than virtually any other proposal on the table at this point. Unfortunately, the proposals have virtually no chance of being implemented.

So it goes.

Posted by Tom at 12:01 AM | Comments (0) |

February 2, 2010

Running into the abyss

17th century philosopher Blaise Pascal observed in his Penses that we run heedlessly into the abyss after putting something in front of us to stop us seeing it.

Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program, observed something similar in his quarterly report regarding the troubled TARP program:

The government's bailout of financial institutions deemed "too big to fail" has created a risk that the United States could face a worse fiscal meltdown in the future, an independent watchdog assigned to review the program told Congress on Sunday.

The Troubled Assets Relief Program, known as TARP, has not addressed the problems that led to the last crisis and in some case those problems have festered and are a bigger threat than before, warned Neil Barofsky, the special inspector general at the Treasury Department.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

Barofsky wrote the $700 billion financial bailout has encouraged more risk-taking because bank executives, who are still receiving massive bonuses, figure the government will come to the rescue the next time they steer their ships nearly aground.  .   .   .

None of what Barofsky reports is a surprise to regular readers of this blog. It was not rocket science.

Posted by Tom at 12:01 AM | Comments (0) |

January 21, 2010

We sure have progressed, haven’t we?

Larry Ribstein points us to the abstract of a new Peter Leeson paper, Ordeals:

For 400 years the most sophisticated persons in Europe decided difficult criminal cases by asking the defendant to thrust his arm into a cauldron of boiling water and fish out a ring. If his arm was unharmed, he was exonerated. If not, he was convicted. Alternatively, a priest dunked the defendant in a pool. Sinking proved his innocence; floating proved his guilt. People called these trials ordeals.

No one alive today believes ordeals were a good way to decide defendants' guilt. But maybe they should. This paper investigates the law and economics of ordeals. I argue that ordeals accurately assigned accused criminals' guilt and innocence. They did this by leveraging a medieval superstition called iudicium Dei. According to this superstition, God condemned the guilty and exonerated the innocent through clergy conducted physical tests.

It sure is comforting to know that we sophisticated modern folk no longer believe that such ordeals are a good way to decide the guilt of a defendant.

On the other hand .   .   .

Posted by Tom at 12:01 AM | Comments (0) |

January 20, 2010

The growing threat of prosecutorial power

A frequent topic on this blog is the overcriminalization of American life, particularly in regard to taking business risks that create jobs for communities and wealth for citizens.

One of the most lucid writers on this disturbing trend is William Anderson (prior posts here), an economics professor at Frostburg State in Maryland. In this recent Regulation magazine article for the Cato Institute, Professor Anderson provides an excellent overview of how the federal government has gradually imposed police state-type laws on us that allow prosecutors to target citizens for a criminal case and then rationalize a crime from any number of vague criminal statutes:

The numbers tell a harsh story. In 1980, there were about 1,500 federal prosecutors and approximately 20,000 federal prisoners. Today, there are more than 7,500 U.S. attorneys and more than 200,000 federal prisoners, according to an October 2009 count. About 52 percent of federal prisoners are drug offenders, reflecting the emphasis of the �War on Drugs,� and while there is no specific �white collar� crime category, one estimates, using Federal Bureau of Prisons statistics, that about 5 to 10 percent of the federal prison population consists of people convicted of white collar crimes.

The federal criminal code is growing. In the early days of the republic, there were three federal crimes: piracy, treason, and counterfeiting. Today, there are more than 4,000 federal criminal laws and more than 10,000 regulations that prosecutors easily can fold into the criminal statutes.  .   .  .

In surveying this sad state of affairs, Anderson notes one of the perverse incentives driving these dubious prosecutions:

The resulting near-free reign that prosecutors have in federal court is an open invitation to abuse of the law and the legal system. To make matters worse, federal prosecutors enjoy almost total legal immunity and are unlikely to face any sanctions no matter how dishonest or abusive their behavior might be; the rules that apply to everyone else do not apply to U.S. attorneys. [.  .  .]

The only thing that stands between almost any American and doing a stretch in federal prison is the choice of whom prosecutors will target. This is a serious problem that shows no signs of disappearing.

The fact that one such prosecutor in Massachusetts was even seriously considered by many in that state for a position in the U.S. Senate reflects that citizens still have not grasped the extent of this awful trend in American society.

It makes one wonder what it�s going to take for Americans to stand up and put a stop to this?

Posted by Tom at 12:01 AM | Comments (0) |

January 18, 2010

So, you want to be a big-firm deal lawyer?

Continuing to fly well beneath the radar screen -- probably because lawyers don't want to talk about it except in hushed tones -- is the seven-year prison sentence that former Mayer Brown partner Joseph P. Collins was handed late last week.

As this earlier post explains in detail, Collins was the former outside deal lawyer for Refco, Inc., which unraveled back in 2005 under the weight of public disclosure of a series of insider transactions that were apparently designed to hide millions in liabilities from customers and investors.

As the earlier post notes and as the Memorandum of Law in support of a new trial for Collins explains, whether Collins even knew about the allegedly fraudulent nature of the transactions is highly questionable and whether he hid those transactions from anyone is even more dubious. But that hardly matters in this era of "let's hammer the white-collar defendant."

Meanwhile, Collins' family will be deprived of the presence of their father for seven years.

What is it going to take for this madness to stop? A truly civilized society would find a better way.

Memorandum of Law in Support of New Trial for former Refco, Inc outside counsel, Joseph P. Collins

Posted by Tom at 12:01 AM | Comments (0) |

January 15, 2010

One step forward, a big step back

Well, so finally the Department of Justice did the right thing and dismissed the remaining criminal charges against former Merrill Lynch banker, Dan Bayly, in connection with the shameful Enron-related Nigerian Barge prosecution.

Even in the heavily-littered landscape of failed Enron-related prosecutions, the Nigerian Barge prosecution stood out for its sheer brazen nature. As noted in this post from over five years ago (!), the Nigerian Barge prosecution was baseless from the start and, as later developments revealed, trumped-up to boot.

After prosecuting Arthur Andersen out of business in the intensely anti-business post-Enron climate of Houston in 2004, the Enron Task Force threatened to do the same to Merrill Lynch unless the firm served up some sacrificial lambs, which it did by offering Mr. Bayly, Robert Furst, James Brown and William Fuhs.

Through a deferred prosecution agreement with Merrill, the Task Force then proceeded to hamstring the Merrill defendants' defense by limiting access to other Merrill Lynch executives who were involved in the barge transaction. To make matters worse, the Task Force then intimidated other potentially exculpatory witnesses by threatening to indict them if they cooperated with the Merrill defendants� defense.

Thus, after bludgeoning a couple of plea deals from former key witnesses Ben Glisan and Michael Kopper, the Task Force proceeded to put on a paper-thin case against the defendants, which was good enough to obtain convictions.

Of course, most of the convictions were vacated on appeal (and in Fuhs' case, thrown out completely), but not before each of the Merrill defendants had served over a year in prison and their families had incurred the incalculable human cost of these misguided prosecutions.

Incredibly, over the past couple of years, the Department of Justice (the Enron Task Force has, mercifully, been disbanded) actually has been threatening to pursue a re-trial of the Merrill defendants. Accordingly, the dismissal of the remaining charges against Mr. Bayly was good news. A similar dismissal of charges against his remaining co-defendants - Messrs. Furst and Brown � would certainly follow, right?

Apparently not, at least for the time being. Inexplicably, the DOJ announced yesterday that it is continuing to pursue charges against Mr. Furst.

So, Mr. Furst unloaded on the DOJ yesterday with the filing of this motion to dismiss on the grounds of pervasive and egregious prosecutorial misconduct. You can review the motion here, but if you go ahead and download it, then you can review a version of the motion that is bookmarked in Adobe Acrobat to facilitate ease of review. Inasmuch as the 45 page motion includes about 350 pages of exhibits, bookmarks are helpful.

The summary of the motion gets right to the shocking point:

The American criminal justice system is built upon the principle that the government�s interest �is not that it shall win a case, but that justice shall be done.� Berger v. United States, 295 U.S. 78, 88 (1935). The Enron Task Force (the �ETF�)�a team of prosecutors and investigators formed in 2002 to address the public demand for individual accountability in the aftermath of Enron�s collapse�investigated, indicted, and prosecuted Defendant Robert Furst and his co-defendants with the goal to win at all costs. And the ETF �won��Mr. Furst spent almost a year in prison before his conviction was overturned on appeal.

But to secure victory, the ETF engaged in a campaign of misconduct which violated Mr. Furst�s constitutional rights to due process and a fair trial. This misconduct was necessary because the case the ETF indicted and hoped to prosecute, which would involve a sordid tale of a well-organized conspiracy to defraud Enron and its shareholders, was not supported by the facts.

The ETF could not prove that Enron or its shareholders lost any money in the barge transaction, because they did not. The form and mechanics of the transaction were thoroughly vetted through hundreds of hours of negotiation by dozens of highly-competent attorneys. Witnesses interviewed by the ETF undercut its theory of the case. In short, the barge transaction had all the markings of a legitimate business transaction, because it was.

But legitimate business transactions do not generate convictions, and the ETF needed convictions. So, in order to ensure victory, the ETF:

? withheld volumes of exculpatory, case-dispositive evidence which nullified its theory of criminal liability;

? manipulated and misstated exculpatory testimony in pretrial disclosures to make it appear inculpatory;

? silenced witnesses by indiscriminately designating nearly all material witnesses as unindicted co-conspirators; and

? sponsored inculpatory testimony that it knew was false.

The ETF�s conduct did not end with the return of the verdict. After trial, but before sentencing, the ETF received additional case-dispositive, exculpatory evidence from one of the key witnesses in the case. This evidence further nullified the ETF�s theory of criminal liability, and exculpated Mr. Furst.

Rather than disclosing this evidence to the Court, the ETF instead withheld the evidence and brazenly asked this Court to enhance Mr. Furst�s sentence for conduct which was negated by this and other evidence in the ETF�s possession. This misconduct eliminates all faith in the integrity of the jury�s verdict and warrants dismissal of the Indictment.  .   .   .

The mess that is the Nigerian Barge prosecution is a quintessential example of what happens when government is given the leeway to bastardize charges to criminalize a merely questionable business transaction and then appeal to juror resentment against wealthy businesspeople to procure politically popular convictions.

The damage to the defendants, their careers and their families that this abuse of power has caused is bad enough. But the carnage to justice and respect for the rule of law is even more ominous. Does anyone really think that they could stand upright in the winds of such abusive governmental power if that gale turned toward them?

The remaining charges against Messrs. Furst and Brown should be dismissed. Not only for their protection, but for ours, too.

Posted by Tom at 12:01 AM | Comments (0) |

January 13, 2010

Game, Set, Match -- Houston

O.K., so the Cowboys are doing alright so far in this season�s NFL playoffs and the Texans, as usual, are in their annual �wait until next season� mode.

But there are other areas in which Houston simply throttles Dallas, hands down.

For example, in connection with its mandate to promote Houston, the Greater Houston Convention and Visitor�s Bureau released the video below late last year. Featuring the edgy local band The TonTons, the video does a very nice job of providing an attractive introduction to Houston:

But I didn�t realize just how good the GHCVB�s video was until I came across the abominable video below that the City of Dallas recently produced for the Professional Convention Management Association:

Key tip to Dallas � you are trying way too hard.

Posted by Tom at 12:01 AM | Comments (2) |

January 5, 2010

Understanding Adoption

One of the most discouraging aspects of the societal tide of resentment and scapegoating that has permeated the corporate criminal prosecutions since the demise of Enron has been the utter lack of perspective regarding the horrendous human cost of those prosecutions.

Even the horrendous financial cost of those prosecutions seems easier to confront.

A stark example of the human cost is what happened to Ken Lay's family, who endured the decline of a loving father and grandfather as he defended himself against dubious charges that in a less-heated climate would likely never have been pursued.

Equally barbaric is the reprehensible 24-year prison sentence assessed to former Enron CEO Jeff Skilling, whose family has been deprived of their father for over three years now and is threatened to be without him for most of the rest of his life.

But the family that arguably paid the steepest cost from the wave of unjust corporate prosecutions was the family of Jamie Olis, the former mid-level Dynegy executive who was thrown to the prosecutorial wolves by his employer and then sentenced to a ludicrously excessive 24 plus-year prison term for his involvement in a structured finance transaction for which he profited not one dime.

The Fifth Circuit Court of Appeals ultimately threw out that sentence, which resulted in a still-too-harsh six-year re-sentencing. Olis was finally paroled last year and reunited with his wife and young daughter, who literally grew up visiting her father in prison.

But even in the face of such inhumanity, the human spirit perseveres.

Throughout the Olis family's ordeal, Jamie's father -- Bill Olis -- stood out as a rock of stability and common sense.

Whether it was attending the myriad of hearings in Jamie's case in Houston, or escorting Jamie's wife and daughter the hundreds of miles to visit Jamie in far-off prisons, or lending moral support to other families who were enduring similar injustices, Bill Olis projected a sense of calm perspective that was contagious to all who came in contact with him.

He had much to be bitter about in regard to what the federal government did to his son and family, but Bill Olis never gave in to bitterness. He was a quintessential Christian gentleman and nothing that the government did to his family could change that.

Throughout his son's darkest times, Bill remained confident that he and his family would ultimately be reunited with Jamie. Yeah, the government is powerful, but no earthly force was going to destroy Bill Olis' family.

As a result, Ellen Podgor of the White Collar Crime Prof Blog re-named her "Collar for the Best Parent Award" to the "Bill Olis Best Parent Award" because -- in the category of a parent supporting an imprisoned child -- "no one comes close to Bill Olis."

What was not well known through all of this was that Bill Olis was slowly fading away physically during his son's imprisonment. Bill had an oxygen unit with him almost constantly as he tended to his family's needs throughout their ordeal. No big deal for Bill. Mere failing health was not going to stop Bill Olis from being present when his son was released from prison last year. He was there embracing Jamie with the rest of the family, oxygen tank and all.

With the work of reuniting his son with his family done, Bill Olis died over this past weekend. I understand from a family friend that Jamie was able to spend most of Bill's final two weeks with him, which I know Bill enjoyed immensely. He adored his son.

The Olis family story is a remarkable one and frankly far more interesting than the government's dishonest case against Jamie. Years ago, Bill Olis married a single Korean mother and adopted her young son. He provided his wife and son a stable and loving home, and the family flourished. His son excelled in school, obtained advanced degrees in both business and law, and embarked upon a successful career in corporate finance. And when the government targeted the son as a sacrificial lamb for the anti-business mob, Bill Olis spent his last days in this world supporting his son every step of the way and making sure that he returned to his wife and daughter.

Then he passed away.

A Christian minister friend once observed to me that a good way to embrace what is good about the Christian spirit is through understanding the nature of adoption.

Bill Olis was living proof of the truth of that observation.

Posted by Tom at 12:01 AM | Comments (0) |

December 31, 2009

The Mike Leach Train Wreck

After what happened earlier this year, no one should really be surprised that Texas Tech University elected to fire Mike Leach yesterday.

But we still are. Just how does someone as successful and intelligent as Leach lose one of the 20 or so highest-paying jobs in big-time college football?

Absent a financial settlement between Tech and Leach, this mess will make for a particularly nasty lawsuit. From the beginning of their relationship, Tech has never been entirely comfortable with Leach, while Leach has been without success trying to find a better job than the Tech gig almost from the day he set foot in Lubbock. So, both parties have incentive to get this settled without exposing all that dirty laundry in court, notwithstanding Leach's somewhat provocative public statement about his termination.

Frankly, I don't have a clue from reading media reports whether Leach's handling of Adam James justified a termination for cause (i.e., no further compensation) under his contract. Football is a tough sport and coaches are often rough on players to make a point. Leach has also alleged publicly that James was a slacker and that his prominent father lobbied him and the other Tech coaches on behalf of his son. For what it's worth, Leach has supporters and detractors among the folks close to the program who have personal knowledge about the situation.

Although Leach's alleged conduct toward James was clearly odd and certainly meant to embarrass the young man, it's reasonably clear that James was never physically endangered or abused. Thus, this does not appear to be a situation that rises to the level of risking what happened to Ereck Plancher at at Central Florida last year or the alleged physical and verbal abuse that supposedly led to the recent resignation of Mark Mangino at Kansas.

On the other hand, this is another example of a situation that -- for whatever reason -- Leach just didn't handle well.

Beyond his shabby treatment of James, Leach was apparently given the opportunity by Tech to resolve the matter privately with an apology to James. Leach balked at that, so Tech suspended him from coaching the upcoming Alamo Bowl game. When Leach sued Tech seeking to be "unsuspended," Tech fired him (in my experience, employers often have that reaction when sued by their employees). That's not the advice I would have given Leach, but his lawyer (Ted A. Liggett) purports to be on the aggressive side.

Furthermore, stories about Leach's eccentric behavior have circulated for years. For example, Leach's tardiness for meetings is legendary (sometimes very tardy) and has caused much misery for his staff and players. When one of his players called Leach out on Twitter about that habit earlier this year, Leach reacted by banning Tech's players from using Twitter. Leach has also used poor judgment in making public remarks about assistant coaches on his staff.

Finally, although Leach did a good job at Tech, his public relations were better than his overall record.

But still, even with all that, how did it come to this?

Given Leach's eccentricities, there is certainly no assurance that any other big-time college football program will take a flyer on him -- it's telling that none came calling during his successful tenure at Tech. Leach has now blown a contract that would have paid he and his family around $11 million over the next four years and may well be the best contract that he ever has.

And what does he have left to show for it? A lawsuit.

As complicated as we tend to make such issues, my sense is that the answer to what would have prevented this imbroglio is really quite simple.

Mike Leach needs to grow up.

Posted by Tom at 12:01 AM | Comments (0) |

December 29, 2009

Thinking about security theater

Given the Homeland Security Department and Transportation Security Administration's typically over-the-top reaction (see also here) to the Christmas Day attempt to blow up a jet flying into Detroit from Amsterdam, one wonders at what point the government's elaborate "security theater" will finally make flying so miserable that it will choke the life out of the U.S. airline industry? Professor Bainbridge provides a good roundup of the blogosphere's discussion of that and related issues.

The latest incident also reminded me of this prophetic Bruce Schneier post from about a month ago. Schneier does the best job that I've read of explaining why a balance between legitimate and symbolic is helpful in deterring terrorism, but that most of Homeland Security's security theater is utterly misguided, as well as a waste of time and resources.

The entire post is excellent, but two points he makes are particularly important.

First, Schneier observes that the governmental impulse "to do something" in response to an attack is mostly misdirected:

Often, this 'something' is directly related to the details of a recent event: we confiscate liquids, screen shoes, and ban box cutters on aeroplanes. But it's not the target and tactics of the last attack that are important, but the next attack. These measures are only effective if we happen to guess what the next terrorists are planning .   .   . Terrorists don't care what they blow up and it shouldn't be our goal merely to force the terrorists to make a minor change in their tactics or targets  .   .   .

Even more importantly, Schneier points out that the right kind of security theater -- that is, the best way to counteract the damage that terrorism attempts to inflict upon all of us -- is to act as if we are not scared of it:

The best way to help people feel secure is by acting secure around them. Instead of reacting to terrorism with fear, we -- and our leaders -- need to react with indomitability.

By not overreacting, by not responding to movie-plot threats, and by not becoming defensive, we demonstrate the resilience of our society, in our laws, our culture, our freedoms. There is a difference between indomitability and arrogant 'bring 'em on' ehetoric. There's a difference between accepting the inherent risk that comes with a free and open society, and hyping the threats .   .   .

Despite fearful rhetoric to the contrary, terrorism is not a transcendent threat. A terrorist attack cannot possibly destroy a country's way of life; it's only our reaction to that attack that can do that kind of damage.

Schneier is spot on. Rather than making air travel increasingly distasteful, Homeland Security and the TSA ought to be encouraging Americans to spit in the terrorists' collective eye by traveling even more by air under reasonably tolerable and legitimate security arrangements.

Posted by Tom at 12:01 AM | Comments (1) |

December 26, 2009

Again, why bother with a trial?

The popular view is that R. Allen Stanford is a crook and should spend the rest of his life in prison.

But doesn't the U.S. Constitution -- not to speak of simple human decency -- provide him with the opportunity to contest the government's charges against him fairly?

These earlier posts (here, too) touched on the indefensible prison conditions that the federal government has imposed on R. Allen Stanford as he awaits trial on criminal fraud charges arising from the demise of Stanford Financial Group.

Last week, Stanford's lawyers filed the motion below requesting that U.S. District Judge David Hittner release Stanford on strict conditions pending his trial that would make it virtually impossible for him to go to the corner drug store without the U.S. Marshals being notified immediately.

Judge Hittner promptly denied the motion without comment, which is next to inexplicable given what is contained in the motion. Here is a mere sampling:

Mr. Stanford has been incarcerated since June 18, 2009 and was moved to the [Federal Detention Center] on September 29, 2009. Immediately upon his arrival at the FDC, he underwent general anesthesia surgery due to injuries that were inflicted upon him at the Joe Corley Detention Facility. He was then immediately taken from surgery and placed in the Maximum Security Section — known as the “Special Housing Unit” (SHU) — in a 7' x 6 1/2' solitary cell. He was kept there, 24 hours a day, unless visited by his lawyers. No other visitors were permitted, nor was he permitted to make or receive telephone calls. He had virtually no contact with other human beings, except for guards or his lawyers.

When he was taken from his cell, even for legal visits, he was forced to put his hands behind his back and place them through a small opening in the door. He then was handcuffed, with his arms behind his back, and removed from his cell. After being searched, he was escorted to the attorney visiting room down the hall from his cell; he was placed in the room and then the guards locked the heavy steel door. He was required, again, to back up to the door and place his shackled hands through the opening, so that the handcuffs could be removed. At the conclusion of his legal visits, he was handcuffed through the steel door, again, and then taken to a different cell where he was once again required to back up to the cell door to have his handcuffs removed and then forced to remove all of his clothing. Once he was nude, the guards then conducted a complete, external and internal search of his body, including his anus and genitalia. He was then shackled and returned to his cell. In his cell there was neither a television nor a radio and only minimal reading material  was made available to him. He remained there in complete solitude and isolation until the next time his lawyers returned for a visit.

In short, Mr. Stanford was confined under the same maximum security conditions as a convicted death row prisoner, even though the allegations against him are for white collar, non-violent offenses. He is certainly not viewed as someone who poses a threat to other persons or the community, nevertheless, he has been deprived of human contact, communication with family and friends, and was incarcerated under conditions reserved for the most violent of convicted criminals. Officials at the FDC informed counsel that this was for Mr. Stanford’s “own protection” and to minimize their liability.  .  .  .

The U.S. criminal justice system used to be an institution that distinguished a free society from those that endured under oppressive regimes.

But with cases such as Stanford's, it's sure getting hard to tell the difference between the U.S. system and the supposedly more oppressive ones.

Mtn for Reconsideration of Detention Order

Posted by Tom at 12:01 AM | Comments (0) |

December 20, 2009

That wild Landry's ride continues

Owning shares of stock in Houston-based Landry's Restaurants, Inc. has never been for the faint-hearted.

First, Landry's board of directors failed to obtain a standstill agreement from Landry's chairman and CEO, Tilman Fertitta, as his failed take-private offers over the past couple of years that would have prevented Fertitta from acquiring majority stock ownership in the company while its stock tanked.

Then, the Pershing Square Capital hedge fund entered the picture, bought up a bunch of Landry's shares and announced that it opposed Fertitta's most recent buyout offer.

Now, as Steve Davidoff explains, it appears that Fertitta has not been complying with his board's instructions in making public disclosures about his buyout offers.

At least partly as a result, counsel for a special committee of Landry's board that was created to negotiate Fertitta's buyout offers resigned, apparently in protest.

As a result of this disclosure and other developments, don't be surprised if the Securities and Exchange Commission comes knocking on Landry's door to look into these developments.

And Tilman Fertitta's firm grip on Landry's from its inception may be slowly slipping away.

Posted by Tom at 12:01 AM | Comments (0) |

December 18, 2009

They got how much? For doing what?

Just when it looked as if progress was being made, the harsh reality of the severe trial penalty and the absurd severity of punishment parameters in white collar criminal cases reared its ugly head.

This time its the harsh sentences that U.S. District Judge Melinda Harmon handed down on Thursday to three former El Paso Natural Gas Company natural gas traders -- 14 years to one defendant and 11 years and 3 months to the other two. They were convicted of multiple counts fraud and false reporting in connection with what has become known in Houston as "the trader cases."

The severity of the sentences is mind-boggling when compared with the nature of the alleged "crime."

The government alleged that the three traders provided false information to natural gas industry publications such as the Inside FERC Gas Market Report, which use data from traders to calculate an index price of natural gas.

Inasmuch as movement in index prices can theoretically affect the level of profits that traders can generate, the government's theory was that the defendants provided false information so that they and El Paso could reap higher profits on their trades.

However, the government never proved that the magazines actually used the false information that the defendants provided to them or that the information actually affected the natural gas markets at all. Indeed, a myriad of market factors affect natural gas prices, as with the price of any commodity.

That was no problem for prosecutors, though. The government contended that the market effect of providing the false information was irrelevant and that the prosecution needed only to prove that false information was reported to the magazines in order to make a gain a conviction of the defendants. And they got away with it.

So, key point to all businesspeople -- don't ever provide any information to a publication about your business that could be construed to be false. It really doesn't make any difference whether the false information affects your company. The government contends that the mere transmittal of the false information is the crime.

Meanwhile, three relatively young men (the oldest is 49) with families and promising careers are now facing over a decade of imprisonment for the "crime" of reporting false price information to a magazine.

Just what is the purpose of this?

Posted by Tom at 12:01 AM | Comments (1) |

December 17, 2009

"Mr. Ruehle, you are a free man"

Larry Ribstein and the WSJ's Holman Jenkins -- both of whom exposed the vacuity of the federal government's backdating witch hunt from the very beginning -- provided their usual insightful perspective on U.S. District Judge Cormac Carney's decision earlier this week to dismiss the government's remaining criminal charges against former Broadcom CFO William J. Ruehle and Broadcom's co-founder, Henry Nicholas, III. A copy of the transcript of Judge Carney's inspiring ruling is below.

Given the excellence of Professor Ribstein and Mr. Jenkins' analysis of the corrupt nature of the backdating prosecutions, there is really nothing to add in that regard. The bottom line is that the unchecked prosecutorial power of the state does enormous damage to lives, families, and careers, as well as job and wealth creation.

But as I read the transcript below and the motion to dismiss that prompted it, imagine my surprise to discover that one of the prosecutors involved in the Broadcom misconduct was a member of the Enron Task Force that engaged in similar conduct in connection with the prosecution of former Enron CEO Jeff Skilling and chairman Ken Lay. Frankly, as bad as the prosecutorial misconduct was in the criminal case against Mr. Ruehle and the other Broadcom executives, it pales in comparison to what prosecutors made Skilling and Lay endure.

Judge Carney provided in the Broadcom prosecutions a perspective of fairness and wisdom that was sadly lacking in the Enron cases. He reminds us that the line between freedom and oppression in civil society is often razor-thin.

His final declaration in the transcript below is one that we should all embrace:

"I don't think anything needs to be said further other than, Mr. Ruehle, you are a free man."

Download Transcript of Judge Carney's Ruling

Posted by Tom at 12:01 AM | Comments (0) |

December 15, 2009

How many felonies did you commit today?

Overcriminalization of daily life, particularly as it relates to punishing taking risks necessary to create jobs and wealth, are common topics on this blog.

Longtime Boston attorney Harvey A. Silverglate is an expert on this troubling trend in American jurisprudence. His recent book -- Three Felonies a Day: How the Feds Target the Innocent (Encounter Books, 2009) -- examines how pliable politicians have expanded the criminal laws to the point where the freedom of virtually anyone who attempts to take risks to create jobs and wealth is subject to the whims of often avaricious prosecutors.

Silverglate is currently guest-posting over at The Volokh Conspiracy where, in this post, he examines how the crime of honest services wire fraud involved in the Skilling case has allowed prosecutors pretty much to choose whether to indict and prosecute business people at their discretion:

Because of the vague terminology increasingly used in the ever-expanding federal criminal code, combined with the erosion of intent as a requirement for conduct to be considered prosecutable, the average citizen can easily commit several felonies in any given day.  .  .  .

“Honest services” fraud is an instructive example of this trend, but the federal law books are cluttered with countless others. Creative interpretations of the Computer Fraud and Abuse Act, obstruction of justice statutes, and controversial Patriot Act provisions—to name a few—have turned honest citizens into federal defendants and even convicted felons. [.  .  .]

This dangerous trend is exacerbated by the “win at all costs” mentality of the Justice Department. Colleagues are turned into stool pigeons as prosecutors offer deals for testimony that often bears little resemblance to the truth. (As my colleague Alan Dershowitz colorfully but all-too-accurately puts it, “prosecutors can pressure witnesses not only to sing, but also to compose.”)

Faced with the prospect of a long prison sentence, enormous costs of defense counsel, and frequent threats to indict family members who are thus held hostage, defendants often choose, to parody an old cigarette commercial, to switch rather than fight.

At some point, shouldn't we be asking the question -- why are we doing this to ourselves?

Posted by Tom at 12:01 AM | Comments (0) |

December 12, 2009

The Skilling Merits Brief

On the heels of the U.S. Supreme Court's hearing earlier this week in Conrad Black's appeal of his criminal conviction on honest services wire-fraud charges under 18 U.S.C. § 1346 ("Section 1346), former Enron CEO Jeff Skilling filed his brief on the merits of his similar appeal with the Supreme Court yesterday.  Oral argument on Skilling's appeal will take place on March1st of next year at 1 p.m.

A copy of the Skilling's merits brief is below. The sections of that copy are bookmarked in Adobe Acrobat to facilitate ease of review, so download a copy to take advantage of those features.

This earlier post and Lyle Denniston's ScotusBlog post on the Skilling merits brief provide thorough analysis of the issues involved in Skilling's appeal, which differ a bit from Lord Black's appeal. So, I won't reiterate those points here.

However, the following are some highlights of the brief, which is well-written and forceful. Citations to the appellate record that are contained in the brief are deleted in the following excerpts.

The following excerpts get to the heart of the appeal:

Skilling not only was tried by jurors drawn from a community passionately committed to convicting him, but he was prosecuted under a vague statute that virtually ensured jurors would vindicate that objective.

Section 1346 is an unconstitutionally vague statute. A federal criminal statute must define the conduct it proscribes so that ordinary persons have notice of what is prohibited, and prosecutors are constrained in what they can prosecute. But everyone agrees that § 1346 on its face says nothing about the conduct it proscribes. To identify its meaning, one must consult almost two decades worth of Federal Reports, searching for cases describing or enforcing the judicially-created crime of honest-services fraud, before this Court rejected them all as exceeding the judicial function in McNally v. U.S., 483 U.S. 350 (1987).

But those cases reflect only the same morass of conflict and confusion that, in part, led this Court to require that Congress define the crime clearly in the first place. Congress did not do so. And it is beyond the judicial function to identify, through common-law exegesis of pre-McNally precedents, the crime that Congress failed to define. [.  .  .]

The Government’s theory is not that Skilling received bribes or kickbacks, or that he directed money or property to an entity in which he had a personal interest, or indeed that he acted for any private gain that was distinct from his ordinary compensation incentives. The Government openly conceded at trial that Skilling stole no money from Enron, that the case against Skilling was not about “greed,” that Skilling sought to pursue Enron’s “best interests,” and that every act for which he was prosecuted was undertaken for the purpose of protecting Enron and promoting its share value.

The Government proceeded on the theory that Skilling nonetheless committed honest-services fraud simply because he took on too much risk for the long-term good of Enron, and improperly touted the company. It did not seek an instruction requiring jurors to find that Skilling acted pursuant to undisclosed personal financial interests in conflict with Enron’s. Instead the Government urged the jury to send Skilling to prison simply because he breached his “duty to do [his] job and do it appropriately.” That theory of honest-services fraud has no grounding in pre-McNally caselaw, and is totally at odds with the Government’s current conception of the statute.

The implications of that theory, moreover, extend far beyond what Congress reasonably could have intended when it enacted § 1346 to overrule McNally, a public-official kickback case. In the private sector, corporate officers are expected to take business risks and cheerlead for their enterprises. A rule that criminalizes every business decision that seems imprudent to prosecutors or lay jurors in hindsight — but does not involve the corrupt pursuit of private gain— would force officers to proceed at their peril in making everyday business judgments. Fortunately, the theory of honest-services fraud the Government advanced below is not the law, as the Government now recognizes.

In that regard, Skilling reminds the Court of the chillingly scant basis of the "crime" the Enron Task Force prosecutors told the jury that Skilling had committed:

In closing argument, the Government declared that Skilling and Lay committed honest-services fraud because they violated a duty to Enron’s “employees” — one prosecutors described as “a duty of good faith and honest services, a duty to be truthful, and a duty to do their job … and do it appropriately.” [.  .  .]

[The Enron Task Force's] consistent position in this case has been that the evidence needed only to show—and did only show—“a material violation of a fiduciary duty that defendants owed to Enron and its shareholders.”

In other words, making a bad decision or doing a poor job in running a business is a crime. Almost nothing else need be said in explaining why the Skilling appeal is of paramount importance to the protection of taking risk and creating wealth in the American business community.

On the issue of why Skilling should have never been tried in Houston, check out part of the brief's summary of the community prejudice against Skilling that the leader of the mob promoted:

What follows is a sampling of the searing media attacks. One column in the Houston Chronicle, entitled “Your Tar and Feathers Ready? Mine Are,” demanded a “witch hunt.” Houstonians maintained that Skilling and Lay had “stole[n] money from investors,” “ripped off their stockholders for billions,” and “destroyed a great corporation.”

Skilling and Lay were compared to Al Qaeda, Hitler, Satan, child molesters, rapists, embezzlers, and terrorists and encouraged to “go to jail” and “to hell.” Some suggested they should face “the old time Code of the West.” A local rap song (entitled “Drop the S Off Skilling”) threatened Skilling’s murder. Polling showed that Houstonians routinely labeled Skilling a “pig,” “snake,” “crook,” “thief,” “fraud,” “asshole,” “criminal,” “bastard,” “scoundrel,” “liar,” “weasel,” “economic terrorist,” “evil,” “deceitful,” “dishonest,” “greedy,” “devious,” “lecherous,” “despicable,” “equivalent [to] an axe murderer,” and a man who had “no conscience,” “stole from employees,” and “swindled a lot of people.” Skilling’s picture was “used as a dartboard” and placed on “Wanted” posters next to Osama bin Laden. When Skilling was indicted, the Chronicle proclaimed: “Most Agree: Indictment Overdue.” The paper’s negative coverage extended to articles on sports, education, music, and more.

After detailing how potential jurors' pre-trial questionnaire answers about the case mirrored the foregoing community prejudice, Skilling describes U.S. District Judge Sim Lake's nominal questioning of the jurors that was hopelessly inadequate to overcome the presumption of community prejudice:

Skilling sought extensive, non-public, individualized voir dire to try to screen out all the potentially biased jurors—especially in light of the questionnaire responses exposing specific prejudices. But the court took the opposite tack, holding voir dire before throngs of reporters in a ceremonial courtroom, limiting it to just five hours, and twice chastising defense counsel for asking too many questions about potential prejudice because the court had prohibited “individual voir dire.” Just 46 people were questioned—eight more than the minimum necessary—and only for a few minutes each. Only seven were struck for cause, with one excused for hardship.

Skilling then explains what should have happened in the face of such clear bias:

[I]f the [District Court] had presumed prejudice among all potential jurors, it could not have refused to permit probing inquiry into each individual juror’s biases. To the contrary, the Government would have been forced to make detailed inquiries of each juror in order to prove each juror’s impartiality beyond a reasonable doubt, and of course the defense would have been entitled to pursue similar lines to smoke out concealed or latent prejudices.

None of that happened here. Instead the district court satisfied itself that Skilling failed to prove actual prejudice for little reason other than the court looked jurors “in the eye” and decided to credit their promises of fairness. If the presumption of prejudice can be rebutted on that kind of showing, the presumption has no meaning at all.

As I've noted many times previously, a humane and civil society would find a better way than what was done to Jeff Skilling to hold people responsible for their errors in business judgment while they are attempting to create jobs for communities and wealth for investors. I remain hopeful that the U.S. Supreme Court will agree.

Jeff Skilling's Merits Brief at SCOTUS

Posted by Tom at 12:01 AM | Comments (0) |

December 10, 2009

Differing compensation under a corrupt -- but entertaining -- system

A frequent topic on this blog has been the NCAA and its member institutions' corrupt regulation of intercollegiate sports.

It's an entertaining system of corruption, but corrupt nonetheless.

Particularly appalling is the NCAA's restriction of compensation to football and basketball players, who are the people who actually generate most of the wealth for the university athletic programs.

In that regard, a couple of news items from yesterday highlight the absurdities that often arise from this perverse regulatory scheme.

First, the University of Texas announced that it has increased the annual salary of its head football coach, Mack Brown, to a cool $5 million.

Now, Brown is a good coach who has done a fine job over the past 12 seasons at Texas. And he is a wonderful man who is a great representative for the University of Texas.

But the only way that UT can rationalize or afford to pay him $5 million per year is that it is not paying a portion of its football income as compensation to the players who create the income in the first place.

By way of comparison, in the National Football League -- which is simply a higher level of professional football than big-time college football -- very few coaches earn $5 million per year despite the fact that NFL franchises generate far more income than UT's football program does.

One of the primary reasons that NFL teams do not generally pay such amounts to their coaches is that a substantial portion of the each NFL team's income is paid to players as compensation.

So, to put it bluntly, Brown makes $5 million annually because UT and the NCAA prevent Longhorn players from receiving fair compensation for the considerable risks that they take.

Meanwhile, excess regulation almost always generates creative efforts to get around those regulations.

Thus, many big-time college football programs provide indirect compensation to their athletes through exclusive use of luxurious "resort" facilities, such as private housing, elaborate workout centers and special academic services.

But those elaborate resort facilities all look alike after awhile.

So, what additional form of indirect compensation can a football program offer to attract the best athletes?

The University of Tennessee has apparently came up with one by utilizing upon one of the oldest forms of compensation known to man.

The NCAA Rules and Regulation Manual already rivals the Internal Revenue Code in terms of length and mind-numbing detail.

Perhaps the Tennessee investigation may at least result in a new section of the NCAA Manual that the football coaches and college administrators might actually enjoy reading?

Posted by Tom at 12:01 AM | Comments (2) |

December 9, 2009

The Real Tiger Tragedy

Watching the carnage unfold from the Tiger Woods affair is a bit like watching a train wreck in slow motion.

A train wreck unfolding with hyper-speed commentary from modern social media, that is.

The affair is a tragedy on several levels, from the public humiliation of Woods' wife to the distinct prospect of job losses in the reeling Woods' business empire (see also here). We should all have sympathy for those who are caught in this cauldron of insecurity resulting from Woods' appalling arrogance and irresponsibility.

But in so saying, it is not my purpose to pile on with more harsh criticism of Woods. The only time I have met Woods was back in the mid-1990's when he was attending Stanford and was in Houston practicing at Lochinvar Golf Club with his then-coach, Butch Harmon, who at that time was the head pro at the club.

When Butch introduced us, Woods could not have been more gracious. He thanked me as a club member for allowing him to practice at such a fine facility. My enduring thought of that brief encounter is that Woods' parents did a very fine job of raising him.

Frankly, the type of societal ridicule that Woods and his family are enduring always makes me a bit uncomfortable. As noted years ago in connection with the death of Ken Lay, the preoccupation with Woods' troubles is a palpable reminder of the fragile nature of the individual and civil society. The vulnerability that underlies our innate human insecurity is scary to behold, so we use myths and the related dynamics of scapegoating and resentment to distract us. We rationalize that a wealthy athlete did bad things that we would never do if placed in the same position (yeah, right) and thus, he is deserving of our scorn and ridicule. That the scapegoat is portrayed as arrogant and irresponsible makes the lynch mob even more bloodthirsty as it attempts to purge collectively that which is too shameful for us to confront individually.

In my experience, people in the public eye are often quite different in the context of a personal relationship than they are perceived publicly. That certainly could be the case with Woods, who people close to the PGA Tour tell me gets along quite well with most of his fellow Tour players. The same cannot be said about a number of other top Tour players from previous eras.

Similarly, the public scrutiny that Woods' private life is currently enduring exceeds anything that a major sports figure has ever had to deal with (the Woods affair has been on the front page of the New York Daily News for the past ten days straight!). Arnold Palmer -- a far more charismatic sportsman than Woods who is one of the few to rival Woods' wealth and business empire -- candidly admitted several years ago that, during his early days of success on the Tour, he had been less than completely faithful to his beloved late wife, Winnie. Although Palmer was never as indiscrete or arrogant as Woods has been, Palmer was also never subjected to the type of media scrutiny that Woods has endured. The media simply handled such things differently in Palmer's heyday.

Moreover, Woods has been unfairly criticized for his behavior since the scandal broke open on the early morning after Thanksgiving. As I noted on Twitter on the Sunday morning after his early Friday morning car wreck, Woods' silence has been absolutely essential and appropriate to the protection of his family and himself. Although none of us know what really happened leading up to Woods' car wreck, Woods and his wife clearly faced at least the distinct possibility of serious criminal charges.

Under those circumstances, any competent lawyer would have advised Woods and his wife to refrain from saying anything to the police or publicly, as many public relations "experts" were proposing that they do. The bottom line is that Woods has done -- and continues to do -- the right thing by remaining silent.

On the other hand, Woods and his business team have their work cut out for them in attempting to stem the damage to the billion dollar Woods business empire resulting from the affair and the societal reaction to it. Woods' main sponsors have stood by him so far, and I suspect that Nike -- his main sponsor from the beginning of his career -- will continue to support him.

But that Woods' sponsors are staying with him now does not mean that they are going to renew their contractual arrangements with him.

You see, Woods has earned most of that billion dollar net worth by parleying his nearly unrivaled record of excellence on the golf course to sponsors who have wanted to associate with that excellence.

What will those sponsors do -- particularly in fast-changing and dynamic advertising markets -- when excellence they previously associated with has been transformed into a joke?

That, my friends, is literally uncharted territory.

Finally, in one key respect, Woods' ordeal is similar to the one that former federal district judge Sam Kent endured over the past couple of years.

That is, how did the life of one of the most phenomenal athletes of our time come to this?

Where were Woods' "friends" who knew about his risky behavior and his thinly-veiled insecurities that were manifested in such behavior?

Why did these "friends" not intervene and help him before it was too late?

The reality is that Tiger Woods may not have any real friends.

And that might just be the saddest tragedy of this entire sordid affair.

Posted by Tom at 12:01 AM | Comments (2) |

November 28, 2009

Noticing injustice

Following on a point made in these earlier posts, the Chron's Mary Flood reports on the indefensible conditions that the federal government has imposed on R. Allen Stanford as he awaits trial on criminal fraud charges arising from the demise of Stanford Financial Group.

Sort of reminds you of the way in which certain other countries handle the prosecution of business executives, doesn't it?

Ironically, while rightfully questioning whether Stanford is being given a fair shake, the Chron continues to avoid examining its equally dubious record in creating a presumption of community prejudice against Jeff Skilling.

Witch hunts do not reflect well on the participants.

Posted by Tom at 12:01 AM | Comments (0) |

November 24, 2009

Who fears freeing whom?

In this lengthy NY Times Magazine piece from this past weekend, Andrew Meier decries the Russian government's unjust prosecution and treatment of former Yukos chairman, Mikhail Khodorkovsky:

Many can’t quite embrace an oligarch as a prisoner of conscience. He is a titan who fell from favor, some say, not a dissident physicist or a novelist arrested for a subversive manuscript. Whatever his sins, though, Khodorkovsky was not jailed for breaking the law. His courting of the Bush White House and pursuit of oil partners at home and abroad infuriated the Kremlin. But his gravest error was to challenge Putin. The reason behind his imprisonment, Khodorkovsky claims, “is well known and widely discussed. It was my constant support of opposition parties and the Kremlin’s desire to deprive them of an independent source of financing. As for the more base reason, it was the desire to seize someone else’s efficient company.”

His motives may have been mercenary, but Khodorkovsky in his cell has come to embody the fiat of the state, its arbitrary and boundless power. To date, the authorities have brought charges against 43 former Yukos employees and associates, conducted more than 100 raids .   .   .

Meanwhile, the Times and most of the rest of the mainstream media have largely ignored -- and often promoted -- similar mistreatment and persecution of business executives in our own country.

Yeah, Russian criminal justice system is corrupt, America's is far superior.

Old narratives die hard.

Posted by Tom at 12:01 AM | Comments (1) |

November 18, 2009

Thinking about financial regulation

Peter Wallison and Steve Randy Waldman have each written a thought-provoking and important analysis of the effect of regulation on the recent financial crisis.

First Wallison:

What caused the financial crisis?

The widely accepted narrative, prominent in the media and pressed by the Obama administration, is that the crisis was caused by deregulation--the "repeal" of the Glass-Steagall Act and the failure to regulate both derivatives and mortgage brokers--which allowed excessive financial innovation, risk taking, and greed among financial players from mortgage brokers to Wall Street bankers.

With this diagnosis, the proposed remedy is more regulation and government control of the financial system, from the over-the-counter derivative markets to mortgage brokers and the compensation of CEOs.

The alternative explanation is that the crisis was caused by the government's own housing policies, which fostered the creation of 25 million subprime and other low-quality mortgages--almost 50 percent of all mortgages in the United States--that are now defaulting at unprecedented rates.

In this narrative, the fact that two-thirds of all these weak mortgages are now held by government agencies, or were produced by government requirements, shows that the demand for these mortgages--and the financial crisis itself--originated in Washington.

The problem for the administration's narrative is that its principal examples do not stand up to analysis: the repeal of a portion of the Glass-Steagall Act did not eliminate the restrictions on banks' securities activities (they were left unchanged), the mortgage brokers were responding to demand created by the government, and, there is no evidence that the failure to regulate credit default swaps (CDS) had any effect in causing or enhancing the financial crisis.

Without a persuasive explanation for the cause of the financial crisis, the administration's regulatory proposals rest on a mythic foundation.

And Waldman:

An enduring truth about financial regulation is this: Given the discretion to do so, financial regulators will always do the wrong thing.

Remember -- it's the incentives, folks.

Posted by Tom at 12:01 AM | Comments (5) |

November 17, 2009

Fertitta gets squeezed this time

Looks as if Tilman Fertitta is about to endure a bit of his own medicine.

As this post from a couple of months ago explains in detail, Landry's Restaurants, Inc. shareholders have had a wild -- and mostly bad -- ride over the past several years as Fertitta (who is the company's founder, CEO and chairman) tried to figure out a way to finance taking the company private.

Because Landry's board failed to obtain a standstill agreement from Fertitta while he put shareholders through a series of failed buyout offers, Fertitta increased his ownership stake in Landry's from approximately 39% to 55% as the company's stock fell as low as $5 per share. As you might expect, Fertitta and the Landry's board are defendants in a shareholder lawsuit in connection with that oversight.

Finally, after shareholders and the markets widely panned Fertitta's Saltgrass Steakhouse spinoff proposal in September, the Landry's board tentatively approved an offer from Fertitta to buy the balance of Landry's shares for $14.75 per share. Compared to the spinoff proposal, Fertitta's cash offer looked relatively good.

There is just one small problem with Fertitta's proposal this time -- under Delaware corporate law, Fertitta had to agree that his proposal is subject to a requirement that a majority of the Landry's shares that Fertitta does not control have to approve the deal.

Enter William Ackman and his Pershing Square Capital Management hedge fund.

In an Schedule 13D filed with the SEC this past Friday, Pershing and its partner William McGuire (the Borders Group chairman) announced that they had purchased just under 10% of Landry's outstanding shares and that they hold derivatives contracts that could hike the share to almost 14% of the oustanding shares.

And while they were at it, Pershing and McGuire announced that they opposed Fertitta's $14.75 per share buyout offer.

So, Fertitta would appear to have only two choices. Either pull his proposal off the table -- and risk a wholesale shareholder revolt of his actions that have depressed the company's stock price over the past several years-- or raise his offer to satisfy Pershing.

And even if he decides to meet Pershing's asking price, where is Fertitta going to find the financing for his proposal? It's not as if the financing markets have been particularly bullish on the company over the past couple of years.

Hold on tight, Landry's shareholders. Your wild ride is not over yet.

The NY Times Steve Davidoff has more.

Posted by Tom at 12:01 AM | Comments (0) |

November 12, 2009

UPS vs. FedEx

Posted by Tom at 12:01 AM | Comments (0) |

November 11, 2009

Refusing to throw in the towel is not a crime

Thank goodness.

Despite the government's sordid expansion of crimes against business people over the past decade, at least it's not a crime to decline to throw in the towel on a business venture simply because there are signs that it might fail. As John Carney eloquently points out, that's in all of our best interests.

Sort of makes one wonder what would have happened if Jeff Skilling had been tried in even a reasonably fair environment?

And the government's response of putting Messrs. Cioffi and Tannin through hell over the past year?:

"Of course, we are disappointed by the outcome in this case, but the jurors have spoken, and we accept their verdict," said Benton Campbell, the U.S. Attorney for the Eastern District of New York, in a written statement.

Of course, the off-the-record response was a tad less diplomatic toward the jury. But at least Campbell should know about failed prosecutions. Is a result such as this the reason why he insists on continuing to bring them?

Update: Frostburg State Economics Professor William Anderson, who has written extensively on the adverse economic impact of the government's criminalization of business policy, followed the trial closely and provides this insightful postscript, which includes the following insightful observation about the obstacles that defendants face even in the face of a weak prosecution:

If anything, the slanderous and dishonest post-acquittal remarks by prosecutors drive home just how contemptuous federal prosecutors are of everyone else. The jury did not acquit because they were too stupid and vapid to understand the clarity of the prosecution�s case; they acquitted because they did understand that the government�s simple, clear presentation was not true, or, at very best, did not do a good job of meeting the "reasonable doubt" standards.

I was not surprised at the acquittal, given what I knew was presented in court and given what my sources had been telling me. My only fear was a federal jury being, well, a federal jury that throws sops to those poor, underpaid prosecutors who claim they only are trying to do justice.

In the end, however, the jury did its job, and judge did his job, the defendants were innocent, and the prosecution continued to lie. Oh, and the media will continue to be the media. Like the Bourbons, they "learn nothing and they forget nothing."

Posted by Tom at 12:01 AM | Comments (4) |

November 10, 2009

Too Big Even to Consider Failing

As with many folks in the financial and legal world, I'm finishing up Andrew Ross Sorkin's entertaining new best-seller, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves (Viking 2009). Clear Thinkers favorite Arnold Kling has the best analysis of the book that I've read to date:

Reading the book leads me to ponder the differences between Chauffered America--Hollywood, investment bankers, and high government officials--and Strip Mall America--people who launch businesses like restaurants, hair salons, and other small enterprises. [.  .  .]

The obvious sociological point is that the top finance people live in a bubble, with secret entrances, isolated offices, chauffered automobiles, and private jets. Even the top government officials inhabit this world. Sorkin describes Geithner arriving at the airport in DC and losing it over not being met by a driver. Forced to take a taxi, Geithner turns to his colleague and says that he has no cash. Perhaps this would have been a moment to teach the head of the New York Fed how to use an ATM. [.  .  .]

I do not see how reading this book can help but reinforce a Simon Johnson/James Kwak view of Washington captured by Wall Street. Paulson seems to have no use for anyone who is not a Goldman Sachs alumnus. Geithner seems to have no use for anyone who is not a CEO of a large financial institution. Both of them view the collapse of major Wall Street firms as Armageddon.

The "regulatory overhaul" promised by the Obama Administration is still the same-old, same-old. Chauffered America will be restored to its exalted status, with a few new rules and regulations thrown in.

Instead, somebody should be asking the deeper question about Chauffered America. If Chauffered America were to disappear, would the rest of us miss it? Or could Strip Mall America get along just fine without the big-time bankers and their friends in government?

One comes away from the book with the conclusion that the primary purpose of the government and corporate leaders involved in resolving the crisis was to maintain the elitist culture of Wall Street with regard to financial matters, while at all times making sure that the government protected the maximum number of the folks making the bad bets from ever having to endure the true extent of the risk that they took in placing those bets. That's why things like this happened.

As I noted after the demise of Lehman Brothers last fall, resolving the crisis was not rocket science. Sorkin's book establishes that the leaders who were calling the shots were never going to let on that such was the case.

Posted by Tom at 12:01 AM | Comments (1) |

November 4, 2009

Muddled thinking

Everyone who follows football around these parts is feeling bad for Texans' TE Owen Daniels, who blew out an ACL in this past Sunday's game against Buffalo. He is done for the remainder of the season.

At the time of the injury, Daniels was having the best season of his four-year career and was leading NFL tight ends in receiving yardage.

But what is really bad about Daniels' situation is that he and his agent rolled the dice and rejected the Texans' offer of at least $15 million in guaranteed money for signing a multi-year contract before the beginning of this season. As a result, Daniels is playing this season under a one-year club tender called for by the collective bargaining agreement that pays him $2.8 million.

Daniels and his agent apparent rationale in rejecting the offer was that the Texans were low-balling in comparison to what other first-tier tight ends have received over the past couple of seasons. So, they decided that Daniels should take the risk of injury and play well this season so that, after the season, he could force the Texans either to match a higher offer from another team or let him go to the higher bidder.

But given the high risk of injury in the NFL, how could Daniels and his agent leave at least $12.2 million on the negotiating table? What were they thinking?

Now, Daniels will probably not be able to a complete season at full strength until the 2011 season. And there is no certainty that another lucrative offer will be awaiting him then even if he fully recovers from the injury and plays well.

I don't like the NFL compensation system. I believe it is far too highly-regulated. The system wrongly prevents the players who endure terrible physical risk and create most of the wealth for the owners from offering their services to the highest bidder.

But what I like even less is muddled thinking that results in a huge financial loss for a talented young man such as Daniels.

Posted by Tom at 12:01 AM | Comments (2) |

November 3, 2009

Why is Timothy Geithner still employed?

Last week, we learned that Timothy Geithner, while the head of the New York Fed, let Goldman Sachs and several other large investment banks fleece the Fed in connection with the AIG bailout.

Then, over the weekend, we learn that the Geithner-orchestrated $2.3 billion federal government investment in C.I.T. Group last fall without requiring debtor-in-possession financing protections under chapter 11 of the Bankruptcy Code is going to result in a total loss of that investment. Why? Because C.I.T. has decided to file bankruptcy now.

Now, in the big scheme of things, $2.3 billion is not all that much money when placed in the context of the federal budget and the American economy. Heck, it's not even close to as much as Geithner left on the table for the investment banks in regard to the AIG bailout.

But Geithner has proven beyond a reasonable doubt that he is in over his head. This bailout stuff is not rocket science.

Why is Geithner still Treasury Secretary?

Posted by Tom at 12:01 AM | Comments (3) |

October 29, 2009

Bluffing Geithner is profitable

Say what?

Timothy Geithner -- while heading up the New York Fed in 2008 -- left upwards of $13 billion of taxpayer money on the table to the likes of Goldman Sachs, Merrill Lynch and Deutsche Bank during negotiations over payment of AIG's credit default swaps because "some counterparties insisted on being paid in full" and Geithner "did not want to negotiate separate deals."

As regular readers of this blog know, I thought the federal bailout of AIG and various other Wall Street firms was a bad idea from the start because it prevented our insolvency and reorganization system from allocating the risk of loss among the creditors of the financially-troubled firms.

Nevertheless, after various political forces stoked a climate of fear, Congress approved broad bailout legislation even though it was clear at the time that few of the legislators understood what they were approving.

Not surprisingly, various large creditors of the financially-troubled firms did very well for themselves under the bailout legislation. Can't blame them for protecting their shareholders' interests, now can you?

But really. Geithner got fleeced for billions in regard to AIG's bailout by investment banks that had no negotiating leverage whatsoever. What were the banks going to do if Geithner had demanded that they take a discounted amount? Risk a global financial meltdown by demanding that the Fed pay AIG's CDS's at par?

Geithner let them get away with it. And now he is out Treasury Secretary.

So it goes.

Posted by Tom at 12:01 AM | Comments (0) |

October 27, 2009

Ellen Podgor on the trial penalty

Stetson College of Law Professor Ellen S. Podgor, who authors the popular White Collar Crime Prof Blog, has written an important law review article on a key issue that is confronting defense attorneys and courts in this age of criminalizing merely unpopular business people and practices -- the onerous trial penalty that a defendant faces for electing to exercise the right to force the government to prove guilt beyond a reasonable doubt:

This Article  .  .  . shows that innocence is no longer the key determinant in some aspects of the federal criminal justice system, even for those charged with white collar offenses. Rather, our existing legal system places the risk of going to trial, and in some cases even being charged with a crime, so high, that innocence and guilt no longer become the real considerations. This is especially true for upper level white collar offenders like CEOs3 and corporate entities. In these cases maneuvering the system to receive the least onerous consequences may ensure the best result for the accused party, regardless of innocence.

Arthur Andersen LLP, Jamie Olis, and Jeffrey Skilling proceeded to trial after criminal charges were brought against them. In contrast, KPMG, Gene Foster, and Andrew Fastow secured plea agreements or deferred prosecution agreements with reduced sentences and finite results. As one might imagine, the latter group's sentences or fines were significantly below those of the individuals and entities that proceeded to trial. The pronounced gap between those risking trial and those securing pleas is what raises concerns here. [.  .   .]

The reward of a "not guilty" verdict at trial comes at a high cost. There is the high cost of going to trial, a cost that far exceeds the typical street crime because of the long investigation and trial and in large part be-cause these cases are predominantly a product of documents. It can also be a short-lived verdict when the government decides to proceed against the individual with a second prosecution, even after a not guilty finding. [.  .  .]

This means that innocence or guilt does not frame the judicial process in white collar cases. The risk of trial becomes so great that in order to minimize the possible consequences innocence becomes an irrelevancy. Although the plea bargain to trial differential existed for many years in crimes outside the white collar crime context, the high sentences now being given to individuals and entities charged with white collar crimes place those crimes in comparable stead with street crimes. This gives pause to whether the next phase of wrongful convictions might move beyond street crimes into the white collar world.

My sense is that many prosecutors these days have come to the conclusion that merely obtaining an indictment in a business-related case means that they probably won't have to bother with a trial -- the trial penalty that the defendant faces will almost always prompt a plea bargain. Thus, the indictment itself has become the punishment for risky business behavior that prosecutors simply do not like.

We live in scary times indeed.

Posted by Tom at 12:01 AM | Comments (2) |

October 22, 2009

More thoughts on business "crimes"

Clear Thinkers favorite Holman Jenkins has yet another excellent column this week entitled When Bad Luck is a Crime (or, stated another way, the new crime of violating the obligation to throw in the towel).

Among other points, Jenkins notes that the mainstream media to date has done a poor job of resisting hindsight bias in reporting on business failures:

When it comes to cheering CEOs, booing them or throwing them in jail, a consideration that ought to be nagging is whether we're reacting to luck or design.

Ken Lay, to cite a notorious example, was prosecuted not for the sins that brought down Enron, but for failing to tell investors the company was predestined to fail even as he tried to save it. Exactly the same treatment is now being meted out to two ex-Bear Stearns hedge- fund managers on trial in New York this week. Then there's Ken Lewis, the Bank of America chief, who hasn't been indicted (yet) but is being roundly booed in the media because his acquisition of Merrill Lynch is deemed in retrospect to have been a mistake.

Now we might be tempted to say journalists are especially susceptible to the hindsight fallacy. But a truer statement is that we thrive on it, are its avenging angels, forever treating every bad outcome as proof of incompetence if not malfeasance, and every good outcome as the result of far-seeing excellence. [.  .  .]

.  .  .  Here, journalism, and perhaps only journalism, can unpack the final puzzle—albeit a journalism that properly understands the role of luck in determining the outcomes that so excite journalists and sometimes prosecutors in the first place.

Meanwhile, Stephen Bainbridge and Larry Ribstein -- both of whom have been pre-eminent blogosphere leaders in educating the public about business law issues -- provide insightful analysis of the legal and policy issues involved in the Galleon insider trading case that the Department of Justice initiated late last week.

As noted here before, criminalizing insider trading risks harming legal and socially beneficial trading. The line is thin indeed between illegal insider trading, on one hand, and an entirely legal and productive hedge fund operation on the other.

Sort of makes one wonder whether the criminalization of insider trading does more harm than good?

Posted by Tom at 12:01 AM | Comments (0) |

October 18, 2009

Colbert on the Stock Market

Colbert was on fire this week.

Posted by Tom at 8:17 PM | Comments (0) |

October 15, 2009

The Leader of the Mob reacts

You know, it's not every day that a federal appellate court concludes that a newspaper's coverage of a particular event was a major factor in the creation of a presumption of community prejudice.

But that's precisely what the Fifth Circuit Court of Appeals did with regard to the Houston Chronicle's coverage of the demise of Enron generally and the prosecution of Jeff Skilling specifically  (see pp. 41-45 of the Fifth Circuit decision).

And now the Supreme Court has decided to review the Fifth Circuit's refusal to grant a Skilling a new trial in another venue because of that presumption of community prejudice. That almost never happens.

So, what does Loren Steffy -- the Chronicle's main business columnist and one of the main leaders of the mob against Skilling (see here, here, here, here and here) -- have to say about the Supreme Court's decision to review his handiwork?:

More surprising was the court's decision to review the venue issues. The district court never gave much credence to the argument that pretrial publicity and Enron's stature in Houston tainted potential jurors, and Skilling's attorney, Dan Petrocelli, never mentioned it his is argument before the appeals court.

As I've said before, the media coverage issue is especially interesting, given that someone from Skilling's legal team apparently was actively engaging in the media coverage by making anonymous posts on Chronicle blogs, including this one.

So, let's review. Houston's only daily newspaper reports on the demise of one the city's largest employers in such a biased fashion that an appellate court uses it as a basis for finding a presumption of community prejudice in the criminal trial of one of the company's leading executives. Then, the Supreme Court of the United States finds the issue so troubling that it decides to review it, which rarely happens in regard to this particular issue.

And the leader of the mob's reaction to all this?:

(1) That "the district court never gave much credence" to the issue?

Well, the Fifth Circuit has already decided that the district court was wrong about that.

(ii) That Skilling's lawyer "never mentioned it" during oral argument?

Oral argument is driven by the appellate judges' questions to the lawyers, which in this case were directed to the honest services wire-fraud issue. A substantial part of Skilling's appellate briefs addressed the community prejudice issue.

(iii) That the Chronicle's biased coverage was no big deal because someone from Skilling's team attempted to provide at least a small dose of balance to the Chronicle's biased coverage of the Skilling trial by commenting on Chronicle blog sites?

So much for fair and balanced reporting, eh?

Meanwhile, over the past couple of years, precisely what happened to Enron has also taken down numerous trust-based Wall Street firms and substantial evidence has arisen that the Enron Task Force engaged in widespread prosecutorial misconduct in prosecuting Skilling.

The Chronicle has not even acknowledged the former, while it has soft-pedaled coverage of the serious scandal represented by the latter.

Wouldn't it be ironic if that, in its haste to lead the mob against Skilling and Enron, the Chronicle misses what Larry Ribstein has characterized as the real crime in regard to Enron -- the prosecution of Skilling?

Posted by Tom at 12:01 AM | Comments (5) |

October 14, 2009

The reeling prosecution in the Skilling case

On the heels of the U.S. Supreme Court's decision earlier this year to hear Conrad Black's appeal of his criminal conviction on honest services wire-fraud charges under 18 U.S.C. § 1346 ("Section 1346), the Court yesterday granted former Enron CEO Jeff Skilling's appeal on similar grounds. A copy of the Skilling's cert petition and its appendix, which are bookmarked in Adobe Acrobat to facilitate ease of review, can be downloaded here.

My sense is that Skilling has a good chance of having the Supreme Court overturn his conviction. Here's why.

The Fifth Circuit Court of Appeal's decision in Skilling's appeal -- which is looking by the minute similar to the Fifth Circuit's decision in the Arthur Andersen case that was overturned by a unanimous Supreme Court -- made a mess of two key issues:

(i) application of the honest services wire-fraud statute to Skilling's actions, and

(ii) application of the standard for deciding the proper venue for Skilling's trial in the face of a presumption of community prejudice against Skilling.

As noted previously, the Fifth Circuit panel's decision in Skilling's appeal failed to reconcile the reasoning in upholding Skilling's conviction for honest services wire-fraud with earlier Fifth Circuit panel decisions on the same issue in the Nigerian Barge and Kevin Howard cases. Inasmuch as there is now a split between Fifth Circuit decisions and several other circuit appellate courts on the scope of honest services wire-fraud, the issue is ripe for Supreme Court consideration. Indeed, Justice Antonin Scalia earlier this year urged the Supreme Court to take up the issue in his dissent from denial of certiorari in Sorich, et al v. U.S., 129 S.Ct. 1308, 1310 (2009):

"Without some coherent limiting principle to define what ‘the intangible right of honest services’ is, whence it derives, and how it is violated, this expansive phrase invites abuse by headline grabbing prosecutors in pursuit of local officials, state legislators, and corporate CEOs who engage in any manner of unappealing or ethically questionable conduct.  .   .   . Indeed, it seems to me quite irresponsible to let the current chaos prevail.”

Since Justice Scalia's dissent in Sorich, at least four other Justices (the number it takes to grant an appeal to the Supreme Court) have repeatedly voted over the objection of the Department of Justice to confront the meaning and constitutionality of Section 1346, first in the Black appeal, again in another case in June (Weyhrauch v. U.S.) and now in the Skilling appeal.

As I've noted many times over the years, the Enron Task Force's use of honest services wire-fraud charges to criminalize Enron executives has been the legal equivalent of trying to stick a square peg in a round hole.

Honest services wire-fraud under Section 1346 was intended by Congress to penalize corporate executives and governmental officials for accepting bribes and kickbacks and for engaging in self-dealing at the expense of the employer-- i.e., the private gain requirement of the crime.

The Task Force faced a big problem with prosecuting Skilling at all because he never stole a dime from Enron (that is, no private gain). In fact, the Task Force conceded at trial that, not only did Skilling not embezzle any money from Enron, the case against him was not about “greed,” that Skilling always sought to pursue Enron’s “best interests,” and that every act for which he was being prosecuted was undertaken for the purpose of protecting Enron and promoting its share price.

Despite the foregoing, the Task Force persuaded U.S. District Judge Sim Lake to allow the prosecution to proceed against Skilling on a much broader honest services theory -- that is, that Skilling simply took on too much risk for the long-term good of Enron and improperly touted the company to the markets.

However, all corporate executives take business risks and promote their companies, so a rule that criminalizes any business decision that seems imprudent to prosecutors or lay jurors operating with hindsight bias -- even if if the executive was pursuing the interest of the company -- would force corporate executives to proceed at peril of criminal liability in making day-to-day business judgments. Indeed, in a civil case, Skilling would have had the protection of the "business judgment rule" for his business decisions,  but the Enron Task Force's theory of honest services in Skilling’s case provided for no such defense. Instead, the Task Force lawyers urged the jury to send Skilling to prison effectively for life simply because he breached his duty to do his job and do it appropriately.

Thus, the essence of Skilling's appeal on the honest services wire-fraud issue is that bribes, kickbacks, and self-dealing is what Congress intended to criminalize under Section 1346, not lapses in business judgment. Where a corporate executive has not sought private gain, his conduct -- no matter how questionable, unwise, or wrongful -- should not be subject to prosecution under Section 1346, but should be left to assessment for damages that it caused in a civil lawsuit in which responsibility can be assessed to all potentially responsible parties.

The Supreme Court will also consider Skilling's arguments that (i) if Section 1346 is not limited as described above, it must be struck down entirely as unconstitutionally vague, and (ii) strongly negative publicity about Enron and Skilling in Houston made it impossible for him to be tried by an impartial jury. 

On that latter issue, Skilling argues that the Fifth Circuit improperly allowed Judge Lake to rebut a presumption of community prejudice against Skilling through a superficial voir dire of individual jurors even though the Fifth Circuit concluded that Judge Lake had improperly failed to apply the presumption of community prejudice against Skilling. Frankly, given the extensive evidence of both pervasive local media bias and prospective juror bias against Skilling, if the Supreme Court allows the Fifth Circuit's decision to stand on the venue issue, then a denial of a motion to change the venue of a trial within the Fifth Circuit will effectively no longer be grounds for an appeal.

Accordingly, the Supreme Court's review of Section 1346 in the Skilling appeal and the two related cases directly confronts how avaricious prosecutors have abused the open-ended nature of the statute. The amicus brief of the National Association of Criminal Defense Attorneys in the Skilling appeal sums it up well:

[T]e time has come to resolve the confusion that engulfs the honest services statute. [.  .  .] [The fundamental issue is] whether courts have the power to engraft limiting principles -- none of which has any strong textual basis -- on the vague language of Sec. 1346.  If federal judges lack that power, then the Court must decide whether the honest services statute, shorn of judge-created limiting principles, is void for vagueness  .   .   . The effort by courts to infuse meaning into Sec. 1346 collides .  .  . with the principle that there is no federal common law of crimes.   .    . Federal crimes are defined by statute rather than by common law.

Meanwhile, back down in the trial court part of the Skilling case, things are looking even worse for the prosecution.

First, the Fifth Circuit ordered Judge Lake to re-sentence Skilling because of an error that was made in applying a sentencing enhancement in assessing Skilling's 24-year sentence. The District Court's  docket of Skilling's criminal case reveals that Judge Lake originally scheduled Skilling's re-sentencing for July 30th but that Skilling and the prosecution filed a joint motion requesting Judge Lake to put off the re-sentencing indefinitely pending the filing of Skilling's motion for a new trial, the prosecution's response to that motion, and the Court's disposition of the motion.

In that regard, the Fifth Circuit decision invited Skilling to file a motion for new trial based on issues of prosecutorial misconduct that Skilling raised in the appeal after discovering the evidence post-trial. Specifically, the Fifth Circuit was particularly concerned about the failure of the Enron Task Force to comply with federal rules requiring the disclosure of exculpatory evidence to the defense from the Task Force's pre-trial interviews with main Skilling accuser, former Enron CFO Andrew Fastow.

Fastow testified at trial that he told Skilling about the Global Galactic agreement, which purportedly documented a series of illegal "side deals" between Fastow and former Enron chief accountant Richard Causey that guaranteed Fastow would not lose money on certain special purpose entities that he was managing. Skilling denied any knowledge of the purported agreement.

After Skilling's conviction, the Skilling defense team discovered Fastow interview notes that the Enron Task Force had failed to disclose to the Skilling team prior to trial. Among other things, those notes revealed that Fastow had told the Task Force lawyers that he didn't think he had told Skilling about the Global Galactic agreement. The Fifth Circuit characterized the Task Force's non-disclosure as "troubling" in inviting Skilling to file a motion for new trial with the District Court.

Interestingly, the docket reflects that the parties have requested that the deadline for Skilling's motion for a new trial be pushed back several times over the past six months. The deadline is now in mid-November and, as a result of the Supreme decision to review of Skilling's appeal, will probably be pushed back until after the Supreme Court rules.

So, what is going on here?

Could it be that Skilling's team has discovered even more exculpatory evidence that the Task Force failed to disclose to the Skilling defense prior to the trial?

Could it be that the government's current lawyers -- who were not members of the now-disbanded Task Force --  are now finding themselves dealing with a serious failure of the Task Force members to comply with rules requiring the disclosure of exculpatory evidence to the defense in Skilling's case and have little incentive to cover for their predecessors?

In short, could the Skilling case in the trial court be turning into something similar to this?

Finally, as if to remind us how little we have learned from the Enron debacle, on the same day that the Supreme Court announced that it would consider Skilling's appeal, the parties began picking a jury in the criminal case against two Bear Stearns executives who are accused of committing the "crime" of violating the obligation to throw in the towel on their business venture. Larry Ribstein has more.

A humane and civil society would find a better way to hold people responsible for their errors in business judgment while creating jobs for communities and wealth for investors. I am hopeful that the Supreme Court will agree.

Posted by Tom at 12:01 AM | Comments (1) |

October 8, 2009

The mind of a true thief

Disgraced New York City attorney Marc Dreier's letter to his sentencing judge was quite interesting. His recent 60 Minutes interview is just as fascinating.

Dreier -- who unquestionably stole over $400 million -- received a lighter prison sentence than former Enron CEO Jeff Skilling, who didn't steal a dime.

There is a huge difference between what Marc Dreier did and what Jeff Skilling did. It reflects poorly on us that our criminal justice system cannot distinguish between the two.

Posted by Tom at 12:01 AM | Comments (0) |

October 7, 2009

Fat chance

A couple of interesting health care-related items caught my eye today.

First, I went by my internist's office for my annual physical and noticed that another group of doctors had leased a much larger office across the hall from my doctor's office.

I peaked inside the new doctors' office window and noticed that the reception area was nicely furnished with plush leather sofas and chairs, flat screen TV's, handsome hardwood flooring and tasteful Persian rugs.

The opulence of the office prompted me to find out what kind of doctors were apparently doing so well, so I grabbed one of the doctor's cards from the reception area. It read (not the real name):

"John Smith, M.D., Laparoscopic Obesity Surgery"

Meanwhile, this NY Times article reveals the utterly unsurprising fact that New York City regulations requiring fast food restaurants to post the caloric content of their food did not induce obese consumers from eating less:

A study of New York City’s pioneering law on posting calories in restaurant chains suggests that when it comes to deciding what to order, people’s stomachs are more powerful than their brains.

The study, by several professors at New York University and Yale, tracked customers at four fast-food chains — McDonald’s, Wendy’s, Burger King and Kentucky Fried Chicken — in poor neighborhoods of New York City where there are high rates of obesity.

It found that about half the customers noticed the calorie counts, which were prominently posted on menu boards. About 28 percent of those who noticed them said the information had influenced their ordering, and 9 out of 10 of those said they had made healthier choices as a result.

But when the researchers checked receipts afterward, they found that people had, in fact, ordered slightly more calories than the typical customer had before the labeling law went into effect, in July 2008.

The findings, to be published Tuesday in the online version of the journal Health Affairs come amid the spreading popularity of calorie-counting proposals as a way to improve public health across the country.

“I think it does show us that labels are not enough,” Brian Elbel, an assistant professor at the New York University School of Medicine and the lead author of the study, said in an interview.

"Labels are not enough?" Makes one wonder what regulation Professor Elbel will suggest next -- maybe governmental rationing of fast food?

The argument in favor of these types of absurd governmental intrusions into our lives is that government subsidizes medical insurance, so government should attempt through regulation to decrease obesity, which unfairly heaps a portion of health-care costs relating to obesity on tax-paying citizens who are not obese.

But putting aside for a moment the debatable notion of whether obesity really increases health-care costs all that much, the far more effective regulation to decrease obesity would be to provide a financial incentive for citizens to lose weight. Namely, reduce the governmental subsidy of medical insurance for those who choose to remain obese.

Fat chance of that happening.

Posted by Tom at 12:01 AM | Comments (2) |

October 4, 2009

Capitalism, Whole Foods-style

Whole Foods' CEO John Mackey, who is certainly not a conventional business executive, provides in this Stephen Moore/WSJ interview a compelling counterbalance to Michael Moore's indictment of a market-based economy:

His odyssey from a long-haired counterculture anticapitalist in the early 1970s to running a company that now has $8 billion in sales and 280 stores—is a remarkable tale in itself. He attended the University of Texas where he studied philosophy and religion. [. . .]

Before I started my business, my political philosophy was that business is evil and government is good. I think I just breathed it in with the culture. Businesses, they're selfish because they're trying to make money."

At age 25, John Mackey was mugged by reality. "Once you start meeting a payroll you have a little different attitude about those things." This insight explains why he thinks it's a shame that so few elected officials have ever run a business. "Most are lawyers," he says, which is why Washington treats companies like cash dispensers.

Mr. Mackey's latest crusade involves traveling to college campuses across the country, trying to persuade young people that business, profits and capitalism aren't forces of evil.  .  .  .

Read the entire interview. Providing jobs for communities and creating wealth for investors are good things. It's unfortunate that more executives such as Mackey aren't reminding us of that.

Posted by Tom at 12:01 AM | Comments (0) |

October 3, 2009

Capitalism is Michael Moore's megaphone

Larry Ribstein, who has written extensively about filmmakers' generally negative views toward business -- zeroes in on the irony of Michael Moore's new reductionist documentary on the evils of capitalism:

The irony is that many of these films could not reach a wide audience if not for their backing by – yes, capitalists. [.  .  .]

Capitalism is easy to knock because it produces losers that artists can juxtapose with winners. It gets bad press compared to alternatives like socialism that produces less social wealth but also less envy and resentment. The irony is that some of the biggest winners are also the biggest whiners. Only capitalism enables the dissemination of any ideas that anybody wants to hear. Capitalism gives Michael Moore his megaphone.

It's almost enough to make me an anti-capitalist.

Posted by Tom at 12:01 AM | Comments (0) |

October 1, 2009

What price for taking on this risk?

I've never really understood the basis of the widespread criticism that professional football players are paid too much. In light of the pubic disclosure of the findings of a National Football League-sponsored study regarding the high rate of dementia in former NFL players, it occurs to me that the players aren't paid enough for the risks that they take.

Moreover, what happened to star Florida QB Tim Tebow last weekend underscores that the professional players in big-time college football are even more grossly underpaid than NFL players. Although an entertaining form of corruption, the NCAA's regulation of compensation to the athletes who largely create the wealth for university college football programs is nonetheless stunningly brazen corruption. That the mainstream media and much of the public stand by and continue to allow this parasitic system to flourish does not reflect well on us.

There is nothing wrong with universities being involved in promoting minor league professional football. If university leaders conclude that that such an investment is good for the promotion of the school and the academic environment, then so be it. But let's be honest about it. Allow the players who create wealth for the university to be paid directly, let's allow the universities to establish farm team agreements with NFL teams, and let's cut out the hypocritical incentives that are built into the current system.

Not only will it be fairer for the players who take substantial risk of injury, it would obviate the compromising of academic integrity that universities commonly endure under the current system.

Shouldn't that be enough incentive to reform the current system?

Posted by Tom at 12:01 AM | Comments (4) |

September 29, 2009

Why pay even more?

In addition to being quite frustrating from a purely football standpoint, attending Houston Texans games is incredibly expensive. And as ESPN.com's Lestor Munson points out, if the NFL has its way in the American Needle case currently pending before the U.S. Supreme Court, then professional franchises will have virtual carte blanche to coordinate high prices with other clubs in their leagues.

A group of sports economists led by Roger Noll have filed the brief below with the Supreme Court explaining how the NFL position in favor of an exemption from anti-trust laws will likely result in a loss of consumer welfare. In short, the economists argue that economic research provides a firm basis for distinguishing between collaborative activities of league members that enhance economic efficiency and benefit consumers, on one hand, from collusive activities that are not essential for the efficient operation of a league and that simply benefit league members by reducing competition among teams.

The owners of professional sports leagues have already received a dramatic financial benefit from the billions of dollars of public financing for stadiums that local governments have thrown their way over the past generation. Providing an unnecessary anti-trust exemption that will provide anti-competitive incentives for league members while providing no economic benefit to the members' customers will only make matters worse.

Food for thought as Houston leaders prepare to gift-wrap another dubious public subsidy for the owners of a professional sports franchise.

Sports Economists Amicus Brief in American Needle Case

Posted by Tom at 12:01 AM | Comments (0) |

September 16, 2009

While you're at it, Judge Rakoff

The legal and business communities are still buzzing over U.S. District Judge Jed Rakoff's scathing refusal earlier in the week to approve the proposed $33 million "settlement" (i.e., sweep under the rug) between the SEC and Bank of America over that the Bank's failure (at least transparently) to disclose to its shareholders the billions in bonuses that the Bank agreed that an insolvent Merrill Lynch was allowed to pay to its employees.

The 12-page decision is certainly worth a read. Judge Rakoff tears into into the SEC for contradicting its own guidelines in penalizing BofA shareholders rather than the executives and lawyers who supposedly approved the lack of disclosure. The settlement "does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that misconduct." The Judge didn't buy the SEC's contention that this punishment will result in better management, characterizing it as "absurd." Sort of like the notion that the SEC can really police this type of thing in the first place.

Judge Rakoff goes on in his opinion to raise at least another half-dozen or so good questions about the proposed settlement. But there's a couple more that I wish he'd asked.

A few years ago, former Enron chairman Ken Lay was prosecuted to death for promoting Enron to its shareholders even though he had a reasonable basis for believing that what he was saying about his company was true.

In contrast, the BofA executives and lawyers could not even offer the defense in a criminal fraud trial that the bad things they intentionally failed to tell BofA shareholders about the Merrill Lynch deal were immaterial.

So, isn't it about time that somebody in the federal government acknowledge that it was a mistake to prosecute Ken Lay to death? And isn't it about time that the government do something about this barbaric injustice?

Posted by Tom at 12:01 AM | Comments (0) |

September 10, 2009

The Landry's debacle

There are bad stock plays and there are horrible stock plays. And then there is Houston-based Landry's Restaurants, Inc.

This story began back in July of 2007 when the company announced that it was delinquent in its regulatory filings with the SEC and that it was in need of refinancing over $400 million in debt in a rapidly deteriorating debt market. Shortly thereafter, the company sued some of its bondholders for declaring the company in technical default under their bonds, but the company quickly settled that litigation on not particularly good terms.

A few months later, Landry's announced in January 2008 that its CEO and major shareholder (39%), Tilman Fertitta, had made an offer to take the company private by buying the other 61% of the company's stock for $23.50 share, which worked to be a $1.3 billion deal, including debt.

Given the circumstances, that offer sounded pretty good, particularly given that the proposed purchase price was a 40% premium over the $16.67 share price at the time of the offer.

Unfortunately, a spate of shareholder lawsuits followed Fertitta's bid. By early March, 2008, it was apparent that Fertitta's bid was so speculative that he hadn't even lined up financing for it.

So, in April of 2008, Fertitta lowered his offer to $21 per share because of "tighter credit markets", and Landry's announced that it had accepted that price in June.

But by the fall of 2008, the financial crisis on Wall Street had roiled credit markets even further and Hurricane Ike caused considerable damage to several Landry's properties.

So, in October of 2008, Fertitta lowered his offer to $13.50 per share.

Then, in mid January of 2009, Landry's announced that it was terminating the proposed deal with Fertitta. The reason was a bit convoluted, but here is the gist of it.

Landry's contended that the SEC was requiring the company to issue a proxy statement disclosing information about a confidential commitment letter from the lead lenders on the buyout deal. However, Landry's was negotiating with those same lenders to refinance the bond indebtedness that the company promised to refinance in connection with October, 2007 litigation settlement with its bondholders noted above. Inasmuch as the lenders' commitment for financing Fertitta's buyout required that the terms of the commitment remain confidential, the company elected to terminate the buyout rather than risk that the lenders would declare a default for breach of confidentiality and back out of the financing commitment as well as the negotiations on refinancing the bond indebtedness.

Amidst all this, Landry's stock was tanking, closing at under $5 per share.

Meanwhile, while the take-private bids languished and the company's stock plummeted to historic lows, Fertitta continued to buy more Landry's stock so that he now controls somewhere in the neighborhood of 55% of the company's shares.

Yes, that's right. Despite a series of unsuccessful take-private offers over a year and a half, Landry's board failed to obtain a standstill agreement from Fertitta that would have prevented him from taking a majority equity position while Landry's stock price was tanking.

So, given all of that, how could Fertitta and the Landry's directors screw things up any worse?

How about proposing yet another deal in which Fertitta would buyout Landry's other shareholders in return for giving them an equity stake in a publicly-owned spin-off (Saltgrass Steakhouse) in a brutally competitive niche of the restaurant market?

Prediction: This is not going to turn out well.

Posted by Tom at 12:01 AM | Comments (0) |

September 1, 2009

County Fair, L.A. style

Yet another example of how commercials (see earlier examples here) are providing some of the most creative product on television(H/T Glenn Reynolds ):

Posted by Tom at 12:01 AM | Comments (0) |

August 25, 2009

Amazingly bad decision-making

One fringe benefit of economic downturns is that local public officials generally defer their financial decisions, which tend to be uniformly bad even during good economic times.

Except apparently in Houston.

Over the past few days, Houstonians have been bombarded with a flurry of bad decisions by their public officials, who seem undeterred by the growing consensus that the nation is going through the worst economic recession since the Great Depression of the 1930's.

First, as Kevin Whited notes, the City of Houston publicly announced this past Friday that it had removed the final local regulatory roadblocks to the construction of the long-delayed Ashby high-rise condominium project in a tony residential subdivision near the Texas Medical Center. In so doing, the City forgot to tell the news to the most interested people, namely the owners of the property where the project is to be built.

At any rate, the City's announcement ended an egregious example of local governmental interference with productive development of private property. Of course, in the present climate for financing high-rise condos, the chances of the owners being able to revive the project any time soon are about as good as the Stros' chances of leaping into World Series contention.

Thus, rather than having dozens of wealthy condo owners paying substantial amounts of property taxes and for other City services, the City continues to enjoy the "benefit" of a run-down apartment complex on the property where the Ashby high-rise was to be built.

So, not only did the City fail to take advantage of the opportunity to increase its tax base through re-development of the Ashby high-rise site, it benefited the owners of the site by deterring them from taking the financial risk that would have generated that financial boon to the City.

Now, that type of government mismanagement really takes some effort.

Meanwhile, as if trying to one-up the City's bungling of the Ashby high-rise deal, local governmental officials were reported on Monday to be on the "home stretch" of putting together a financing package for construction of a new downtown soccer stadium, a new jail facility and the redevelopment of the Astrodome.

I mean, really. Where to start?

As noted many times, the City has already paid millions at a top-of-the-market price for the site of the proposed soccer stadium while at least maintaining that it's up to the owners of the Dynamo soccer club to put together the private financing for the construction of the stadium itself.

Now, the City is going to finance the construction of the soccer stadium itself through selling TIRZ bonds? When did the prior approach change? Did I miss something?

Similarly, there's not much left to say about the City and the County governments' reprehensible handing of the Harris County and City jails, both of which have both been condemned by the Department of Justice because of their horrific condition and mismanagement (the latest on the City jail conditions is here).

It's clear that the true problem of the existing jails is a combination of underfunding and needless overcrowding from sloppy processing of prisoners who do not need to be incarcerated pending their trial. So, what do local governmental officials do? Wait until the conditions become so barbaric that all they can do is throw tens of millions of dollars (perhaps illegally?) at constructing yet another jail facility in an attempt to placate federal officials.

But both the proposed soccer stadium and jail facility pale in comparison to the potential boondoggle that is the Astrodome redevelopment project.

After years of assuring local citizens that they would not be called upon to pick up the financing of redeveloping the Dome, local governmental officials are now proposing that the citizens do just that.

And as if to make that change of policy even more galling, the governmental officials who leaked the information on the financing plans to the Chronicle did not even bother to spell out what the Dome is to be turned into as a result of the redevelopment.

So much for transparency, eh?

In the meantime, as City and County officials dither over the details of these proposed boondoggles, City officials continue to ignore this ticking financial time bomb (see also here) while wasting billions on yet another boondoggle, the spending on which swamps even the quarter of a billion proposed for the current round of boondoggles.

Frankly, it's difficult to imagine how even the traditionally resilient Houston economy is going to withstand the dead weight of such pervasive financial mismanagement.

Posted by Tom at 12:01 AM | Comments (2) |

August 11, 2009

Enron, the play

It was probably inevitable, although I would have guessed an opening Off Broadway rather than in London. But the play is actually getting decent reviews. And it almost has to be better than this trash.

Where are Zero Mostel and Gene Wilder when you really need them?

Posted by Tom at 12:01 AM | Comments (0) |

August 7, 2009

The increasing cost of public equity

Frank Quattrone, the former CSFB investment banker who has an interesting perspective, notes a dynamic of the now almost decade-long criminalization of business that I have been warning business owners and lawyers about for quite some time now -- the increasing cost of public equity:

[W]hy did [public offerings] disappear in the first place?

One reason is the heightened bar for small companies to go public, Mr. Quattrone said. Throughout his career, he said, some of the greatest companies he was associated with had $30 million to $50 million in revenue when they went public. Today, he said, bankers require companies to have $100 million or even $200 million in revenue.

Part of the underappreciated societal impact of prosecutors such as those on the Enron Task Force implementing the criminalization of business lottery is that the days of small companies tapping public equity for relatively cheap venture capital are gone. Moreover, the supply of executives who are willing to work for public companies is smaller because many of the best and the brightest simply do not consider the risk of operating in the public domain worth the draconian downside. The result is that investment alternatives for investors in public markets are declining.

Not exactly a policy to encourage economic revival, now is it?

Update: Along the same lines, Larry Ribstein reviews the destruction of public equity wealth in regard to AIG that resulted in no small part from Eliot Spitzer's machinations. It's a risk that I first noted in regard to AIG way back in early 2005. When will we learn?

Posted by Tom at 12:01 AM | Comments (2) |

August 3, 2009

Unintended Consequences

Posted by Tom at 12:01 AM | Comments (0) |

July 21, 2009

Is there a problem with the Airbus 330?

When I travel to Europe, I normally fly on Air France, which is one of my favorite airlines. Professional, orderly, reasonably comfortable and clean. It's amazing how few airlines combine those characteristics these days. 

Air France's fleet includes a large number of Airbus 330 aircraft, which is the aircraft that crashed into the Atlantic Ocean last month on Air France's Flight 447 from Rio de Janeiro to Paris. So, given my preference for Air France, I've been following the development of information on that crash with particular interest.

James Fallows, who is a long-time aviator, follows most aircraft crashes closely, and he has provided much-needed information and insight in his posts on Flight 447 here, here, here and here. Initial speculation on the cause of the crash revolved around multiple system failures occurring during an unusually violent storm.

But now, questions are beginning to emerge as to whether there is a fundamental problem with the design of the Airbus 330. This lengthy David Rose/Mail Online article surveys the evidence that suggests a problem. Here is a list of the recent troubled flights of the Airbus 330 model:

August 2008 - Air Caraibes Atlantique - Paris to Martinique: Plane flying through turbulence experiences failure of autopilot, ADIRU and computerized instruments. Pilots successfully fight to restore control.

September 2008 - Air Caraibes Atlantique - Paris to Martinique: Second Air Caraibes flight to Martinique has identical experience. Plane is same model, different aircraft.

October 7, 2008 - Qantas Flight 72 - Singapore to Perth: Makes emergency landing after twice plunging uncontrollably in flight following failure of ADIRU, autopilot and instruments. 64 injured, 14 seriously.

December 28, 2008 - Qantas Flight 71 - Perth to Singapore: Forced to return to base after failure of autopilot and ADIRU.  Different aircraft, same model as in previous incident.

May 21, 2009 - TAM Flight 8901 - Miami to Sao Paulo: Experiences failure of autopilot, ADIRU and instruments. Crew regain control after five minutes. No injuries. US investigation under way.

June 1, 2009 - Air France Flight 447 - Rio to Paris: Crashes during Atlantic storm, killing 228. Automatic radio messages indicate that in minutes before crash, crew lost autopilot, ADIRU and computerized instruments.

June 23, 2009 - Northwest Airlines - Hong Kong to Tokyo: Flight loses autopilot, ADIRU and instruments before landing safely.  US investigation under way.

Rose goes on to report:

Interviews with pilots, lawyers and crash investigators suggest there may be an underlying problem with A330s. It’s impossible to conclude what this is, but there are two prime suspects – either flaws in the software, or with the wiring found inside huge numbers of modern aircraft.

‘It looks to me like there’s only one reason why AF447 crashed and QF72 survived,’ says Charles-Henri Tardivat, a former crash investigator who’s now part of a team from the London law firm Stewarts Law, which represents the victims’ families. ‘On QF72, the same things started happening that preceded the Air France crash. They were able to recover control because they were flying in daylight and perfect weather. They could see what was happening, even without their instruments. But AF447 was caught in a violent storm at night. The A330 is a very well-built aircraft, but there obviously is a problem somewhere. With so many of them out there, we need to find it.’

Posted by Tom at 12:01 AM | Comments (0) |

July 20, 2009

"Somebody gave him the steal sign"

If you haven't already seen it, then don't miss Jon Stewart's classic destruction of the fawning treatment that former Phillies and Mets outfielder Lenny Dykstra received from several financial media outlets over the past several years in regard to his supposedly magical investment strategies. Ryan Chittum summarizes the media outlets' attraction in Dykstra's case to glitz over substance. Another reminder that the "too good to be true" rule is an important one to embrace when evaluating investment alternatives.

Posted by Tom at 12:01 AM | Comments (2) |

July 15, 2009

The Money Pit

Casey Mulligan's clever post below reminded me of the classic Onion News segment that follows:

In 2008, we were told that each American taxpayer had to spend thousands on bank bailouts in order to avoid utter disaster. We were not supposed to object, because a few thousand is a cheap price to pay for disaster avoidance.

In early 2009, we were told that each American taxpayer had to spend thousands on fiscal stimulus in order to avoid utter disaster. We were not supposed to object, because a few thousand is a cheap price to pay for disaster avoidance.

Now we are told that each American taxpayer has to spend thousands (? amount to be unveiled later) on government health care in order to avoid utter disaster. We were not supposed to object, because a few thousand is a cheap price to pay for disaster avoidance.

We are lucky to have the White House to save us from so many disasters!

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

Posted by Tom at 12:01 AM | Comments (1) |

June 16, 2009

A small Austin brokerage house schools the big banks

Tongues were wagging in financial circles around the world last week regarding this Wall Street Journal article about Austin-based Amherst Holdings' amazing play in which they sold credit default swaps on mortgage bonds to a number of Wall Street and London's biggest banks. Amherst then turned around and bought the mortgages underlying the bonds upon which the CDS were written to prevent a default that would have triggered Amherst's obligation to pay on the CDS.

Thus, in short, Amherst sold CDS on bonds and then bought the security for the bonds, thereby rendering the CDS worthless. Although the amount of profit is somewhat unclear, Amherst reportedly pocketed tens of millions of dollars on the deal.

The Financial Times' economist Willem Buiter does an entertaining job of explaining Amherst's transactional plan in the context of gambling and the difficulties involved in regulating such transactions. In so doing, he makes the following observation:

"The scheme is beautiful in its simplicity, absolutely outrageous, quite unethical, deeply deceptive and duplicitous, indeed quite immoral, but apparently legal."

Geez, maybe these Amherst sharpies could have saved AIG?

Posted by Tom at 12:01 AM | Comments (4) |

June 9, 2009

The thin line of business criminality

In this earlier post regarding former Enron Broadband CFO Kevin Howard's recent plea deal, I predicted that the factual basis for the plea deal would barely describe wrongdoing, much less criminality.

Turns out I was right. Check out paragraph 14 of the plea agreement at the bottom of page 6, which sets forth the factual basis of the deal.

That paragraph describes that Enron had told the market that its Broadband unit had great potential, but that it expected to lose at least $60 million for the year. Inasmuch as Enron's prediction was turning out to be correct, Howard helped arrange a joint venture transaction that monetized a portion of Broadband's lucrative deal with Blockbuster. Nothing unusual about that.

So, what's the problem, you ask? Essentially, the factual basis provides that Howard did not disclose to Enron's auditor (Arthur Andersen) that Enron's joint venture partner was not expecting to be a long-term partner in the joint venture, even though the partner verified by signing the joint venture agreement that it was not relying on any such expectation in connection with entering into the venture. Nevertheless, if Andersen had known that the partner was really not expecting to be in the venture for the long haul despite the terms of the written agreement, suggests the factual statement, then the auditor may not have allowed Enron to account for the deal in a way that reduced the Broadband unit's losses to the $60 million level that the company had projected and ultimately reported.

That's the basis for a crime?

Frankly, U.S. District Judge Vanessa Gilmore should have the same reaction to Howard's proposed plea deal that U.S. District Judge Lynn Hughes had to the equally vacuous deal that Enron Task Force prosecutors crammed down the throat of former Enron mid-level executive Chris Calger back in 2005. At least the DOJ ultimately threw in the towel on the stinky Calger plea deal.

Based on the foregoing, any business executive who engages in a transaction for the purpose of helping his company achieve earning projections is at risk of being indicted and convicted of a crime, and sentenced to a long prison sentence.

And by a long prison sentence, I don't mean the 4-12 months of home confinement to which Howard agreed in his deal.

Remember, the foregoing transaction is one for which Jeff Skilling is currently serving 24 years in prison.

We live in truly perilous times.

Posted by Tom at 12:01 AM | Comments (2) |

May 19, 2009

SCOTUS takes up the honest services issue

Well now, that certainly did not take long, now did it?

Just a week after former Enron CEO Jeff Skilling appealed his criminal conviction and monstrous 24-year prison sentence to the U.S. Supreme Court on an allegedly erroneous application of the honest services wire-fraud statute (18 U.S.C. § 1346), the Supreme Court agreed to hear the appeal of former Hollinger International chairman Conrad Black on similar grounds. The briefs in support and opposition to Black's petition for certiorari to the Supreme Court can be reviewed here.

Black's conviction revolves around allegations that he diverted about $6 million from Hollinger International, which owned the Sun-Times and a number of other newspapers. He and two other former executives whose appeals will also be heard by the Supreme Court -- former Hollinger CFO John Boultbee and corporate counsel Mark Kipnis -- were convicted of three counts of mail fraud based on the theory that they improperly arranged the transfer of $5.5 million from a Hollinger subsidiary under sham non-compete agreements.

The high court's decision to hear Black's appeal on the honest services wire fraud issue leaves the Skilling petition somewhat in limbo. Although Skilling's appeal arguably frames the issue better than Black's, the Court could simply carry Skilling's petition along with Black's appeal and then remand Skilling's case to the Fifth Circuit once it has adjudicated Black's appeal.

But regardless whether the Supreme Court grants cert in Skilling's appeal, the Court's decision to hear Black's appeal is very good news for Skilling.

By the way, as if on cue, Lord Black from his prison cell provides this entertaining evisceration of the forces that prevented him from selling for the benefit of shareholders the now bankrupt and worthless Chicago Sun-Times. Here's a taste of Lord Black's analysis of the situation:

[Former Bush I administration SEC chairman Richard] Breeden, whose career highlights include whitewashing George W. Bush on his lucrative insider trade in Harken Energy shares before the Gulf War in 1991, while he was Bush Sr.'s SEC chairman, and his immensely well-paid stints as special monitor or counsel of KPMG, WorldCom, and Fannie Mae, produced his special committee report in August 2005. (He has since, with no background at all, set up an offshore hedge fund and has promptly lost more than half his investors' money.)

The report had cost over $100 million, accused us of a $500 million kleptocracy, and promised a future of unheard-of profitability for the company. On this, Breeden has delivered, as no profit has been heard of since he usurped the management. He also promised $1 billion of recoveries for the shareholders, and has instead wiped them out; $2 billion from the pockets and retirement and college funds of scores of thousands of people.

His report did fulfill his objective of generating criminal charges that, if substantially successful, could vacate or at least mitigate my $1 billion libel suits against him, the largest defamation claims in Canadian history.

Lord Black is a genuine piece of work.

Posted by Tom at 12:01 AM | Comments (0) |

May 18, 2009

Bad regulation vs. deregulation

Clear Thinkers favorite Niall Ferguson provides this timely reminder to those who believe that the financial turmoil of the past couple of years is the result of lax regulation of financial markets:

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers. And the globalization of finance played a crucial role in raising growth rates in emerging markets, particularly in Asia, propelling hundreds of millions of people out of poverty.

The reality is that crises are more often caused by bad regulation than by deregulation. [.  .  .]

.  .  . Taxpayers, therefore, should beware. It is more than a little convenient for America’s political class to blame deregulation for this financial crisis and the resulting excesses of the free market. Not only does that neatly pass the buck, but it also creates a justification for . . . more regulation. The old Latin question is highly apposite here: Quis custodiet ipsos custodes? — Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure.

Stated another way, it's not that rules are unnecessary for markets to perform efficiently. But what type of rules are better?

Rules that politicians enact and government bureaucrats enforce generally are far less efficient than rules that emerge as a result of the voluntary interactions of millions of individuals and companies. The successes and mistakes of those individuals and companies pursuing their own interests create rules that are the product of competition and personal responsibility. When those rules become sufficiently important in the fabric of a market economy, they become formalized as common law and precedent by courts. The distinction between inefficient government-imposed rules and the decentralized rules that facilitate productive market economies is an important one to understand as we wade through this current financial crisis.

The rules that the government is currently making up on the fly in connection with the Chrysler bankruptcy are a good example of rules that are destined to allocate resources inefficiently.

Posted by Tom at 12:01 AM | Comments (1) |

May 14, 2009

Thinking about the Chrysler deal

Unworkable credit situation, UAW ownership and Italian engineering. What could possibly go wrong?

The blogosphere has really stepped up in analyzing the government-pushed and government-subsidized asset sale by Chrysler out of its only recently-filed chapter 11 case (handy site on the chapter 11 case is here). The best technical bankruptcy analysis has been provided by Steve Jakubowski, while Larry Ribstein, Professor Bainbridge, Mark Roe and the Epicurean Dealmaker have weighed in ably on the policy considerations of the deal. But Todd Zywicki in this W$J op-ed does the best job of summing up the long-range risk of what the Obama Administration is doing here:

By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?

Chrysler's proposed asset sale is unusual, but not unprecedented. Still, the legality of what is going on here is certainly sketchy. And what is unprecedented about this case is the participation of the government in financing the deal and the new Chrysler. Theoretically, another bidder could emerge and top the new Chrysler's bid for the assets. However, such a competing bid simply could not be financed under current market conditions absent a subsidy from another government.

So, what to make of all this? Here's what I will be watching.

Will the government market in Chrysler debt? If so, how will the market price it?

Or will the government simply hold the Chrysler debt as the company attempts to re-invent itself, turning the debt into a type of quasi-equity?

And will a company owned predominantly by a union and the government be able to attract the type of creative management and engineering talent that will be necessary to create wealth for the owners?

Frankly, the government bailout is the easy part. Creating wealth is a whole lot tougher.

Posted by Tom at 12:01 AM | Comments (1) |

May 11, 2009

Is the case against Sir Allen getting more complicated?

On first blush, the criminal case against Sir Allen Stanford, the mercurial chairman of Stanford Financial Group, would appear to be pretty straightforward.

On the other hand, why was the Securities and Exchange Commission apparently falling over itself for years to avoid closing down Stanford Capital, even in the face of credible, inside information provided to the agency regarding Stanford's scam nature?

Could Sir Allen have been keeping the regulators at bay by playing several agencies of the federal government off against one another?:

A Panorama (BBC) investigation has suggested that Sir Allen was shielded from an earlier inquiry into his activities because he co-operated with a US Drug Enforcement Administration (DEA) attempt to track money laundering by Latin American drug cartels. [. . .]

Panorama claimed some US officials were aware of Sir Allen's cartel links as long ago as 1990. It reported that Sir Allen, paid a $3.1 million (£2.05 million) cheque to the DEA in 1999 after that sum was invested in his bank by another Mexican drug gang, the Juarez cartel of Amada Carillo Fuentes.

According to Panorama, whose investigation will air on Monday, Sir Allen was initially investigated by the SEC over suspicions he was running a Ponzi scheme in the summer of 2006, but the inquiry was over by the winter of that year.

The BBC claims the decision to close the investigation followed a request by another government agency.

Panorama says it is aware of "strong evidence" that Sir Allen was a "confidential agent" for the DEA as far back as 1999 and turned over details of money laundering by clients from Colombia, Mexico and Ecuador.

Rodney Gallagher, a British financial investigator, who knew Sir Allen in the 1980s said it was clear to him that the Texan had "a very close relationship with the DEA" and occasionally hired former agency staff to work for him.

The DEA declined to comment to the BBC on its allegations.  .   .  .

If Sir Allen bought time for a scam by playing nice with the DEA, the federal government's dubious prohibition policy toward certain drugs will have added an entirely new layer of costs.

Posted by Tom at 12:01 AM | Comments (0) |

May 9, 2009

Cruising the Houston Ship Channel

The oil and gas industry is synonymous with Houston, but many folks do not know that health care and the Port of Houston are huge economic drivers in the local economy, too. Check out this time lapse video by Lou Vest on a ship leaving the Port of Houston along the Houston Ship Channel. Here is a similar video that Vest did last year during the daytime. Enjoy.

Posted by Tom at 12:01 AM | Comments (0) |

April 29, 2009

Permanent Enron myopia

Inasmuch as what took place with regard to Enron earlier in the decade has now happened to much of Wall Street, the vacuity of the Houston Chronicle's coverage of Enron-related matters has become clear.

Nevertheless, Chronicle business columnist Loren Steffy still cannot work himself out of his small Enron shell.

Most recently, Steffy wrote this column in which he compares Sir Allen Stanford of the beleaguered Stanford Financial Group to former Enron executives, Ken Lay and Jeff Skilling:

All this finger pointing should bring a strong sense of déjà vu to Houstonians, who watched Enron’s meteoric rise and fall, as well as the unsuccessful efforts of the late company chairman Ken Lay and CEO Jeff Skilling to plead ignorance of the company’s fraudulent accounting practices and blame any criminal behavior on the chief financial officer, Andy Fastow.  .  .  .

If Stanford is any indication, the “I’m not a crook, I’m an idiot” defense for CEOs remains alive and well. For those who buy the idea that people who construct and direct massive financial enterprises are really dunces who haven’t a clue how they function, we’ve got a truckload of Enron shares to sell.

Of course, the foregoing is a complete misrepresentation of Skilling and Lay's defense. Rather than contending that he did not know what was going on at Enron, Skilling contended that he was a hand's-on manager over virtually all facets of Enron's far-flung business operations. Similarly, Lay contended that he became intimately involved in day-to-day management of the company after re-taking the Enron CEO role when Skilling resigned unexpectedly in August, 2001. Thus, Skilling and Lay's position was that they were totally engaged in Enron's massive business operations, that there was no wide-ranging fraud, and that Enron's trust-based business model failed when skittish post-9/11 markets became spooked over conflict-of-interest allegations regarding Fastow's role in generally legitimate special purpose entities.

That's a bit different than Sir Allen's defense that "he left all the financial stuff" to Stanford Capital's CFO James Davis, don't you think?

Steffy has done this before in regard to Enron-related matters, so another misrepresentation isn't really surprising. But what is troubling is the Chronicle's continued promotion of Steffy's simplistic world view in which most troubled businesses are seen as merely a vehicle by which greedy and unethical executives exploit helpless investors. Indeed, Steffy's fatuous viewpoint casts complex business events as merely struggles by honest investors against bad executives. Not only does this viewpoint ignore reality, it provides Steffy comfort by allowing himself to feel morally certain and superior to those he is belittling, while saving himself from the hard work of performing any serious analysis.

Morality plays are comfortable and easy to tell. The truth is more nuanced and harder to explain. In choosing to take the easy way out, the Chronicle and Steffy have forfeited the opportunity to provide a valuable service to investors and businesspeople by furthering understanding on such key subjects as the importance of hedging risk and the fragile nature of trust-based businesses.

That type of understanding sure would have come in handy for many investors in Wall Street firms over the past couple of years.

April 30, 2009 Update: Loren Steffy responds here and points out that the quote that I used above is from a Chronicle editorial that he did not write. For that error, I apologize.

However, Steffy's related column here makes the same misrepresentation regarding Ken Lay's defense and Steffy's blog post continues to fail to respond to the misrepresentation.

Some things never change.

Posted by Tom at 12:01 AM | Comments (5) |

April 14, 2009

The Chronicle's Enron myopia

Even when it is on the right side of an issue, the Chronicle reminds us of its failings.

As noted earlier here, it has become fashionable among the Old Media to support the recent decision of the Justice Department to request dismissal of the criminal case against former Alaska senator Ted Stevens because of the DOJ's misconduct in handling the prosecution. The Chronicle chimed in last week with this self-righteous editorial.

Of course, for anyone paying attention, prosecutorial misconduct by the DOJ is not unusual. U.S. District Judge Lewis Kaplan sanctioned the DOJ by dismissing indictments against 13 former KPMG partners. Federal prosecutors in Miami are in hot water with a federal judge there over abusive tactics in a criminal drug case against a local doctor. There even appears to be a connection between the prosecutorial misconduct in the Steven case and the dubious case against former Vice-Presidential aide, Scooter Libby.

As the always-insightful Larry Ribstein points out, could it be that there are agency costs in managing corporate criminal prosecutions just as there are in managing corporations? Along the same lines, Doug Berman suggests that an insidious culture within the DOJ has produced the abuse of power.

But the most galling aspect of the Chronicle's emergent awareness of abusive state power is that it has virtually ignored the egregious examples of prosecutorial misconduct in its own hometown, particularly in the case against Jeff Skilling that resulted in a barbaric and indefensible 24-year prison sentence.

As conflicted publications such as the Wall Street Journal promoted Enron myths and the demonization of Enron executives, the Chronicle could have provided a valuable public service by providing balanced reporting and analysis of what really caused Enron's demise and how such a company can be better-structured to survive in even the most adverse market conditions. When clear evidence of prosecutorial misconduct emerged early in the Enron-related criminal cases, the Chronicle could have provided an even greater public service by taking a strong stand against such dangerous abuse of state power. It's certainly not hard to find historical reminders of the injustice that results from such abuse.

So, what did the Chronicle do instead? It embraced the Enron Myth and led the mob in demonizing Enron executives. From the beginning of the Enron-related criminal cases, the Chronicle editorial staff simply elected to ignore mounting evidence of prosecutorial misconduct in favor of the easier approach of leading the angry mob. The Chronicle's coverage of the Skilling prosecution was so inflammatory and biased that the Fifth Circuit Court of Appeals made the highly unusual finding that the Chronicle created a presumption of community prejudice against Skilling (see pp. 41-45 of the Fifth Circuit decision).

Even now, despite the legacy of prosecutorial misconduct in the Enron-related criminal cases and the fact that what happened to Enron has now happened to many big Wall Street firms, the Chronicle stubbornly clings to the Enron Myth and refuses even to acknowledge that the evidence of prosecutorial abuse in the Enron-related cases is worse than what caused the dismissal of the Stevens case.

As with most Old Media newspapers these days, the Chronicle is struggling to survive. Winning that first Pulitzer Prize sure would sure provide a boost to the Chronicle's flagging spirits.

Wouldn't it be the ultimate irony if the decision to lead the angry mob against Enron distracted the Chronicle from a truly enthralling story of prosecutorial misconduct that could have won the newspaper that elusive Pulitzer?

Posted by Tom at 12:01 AM | Comments (0) |

April 10, 2009

Dylan on Politics

From Bill Flanagan's recent interview with Bob Dylan:

What's your take on politics?

Politics is entertainment. It's a sport. It's for the well groomed and well heeled. The impeccably dressed. Party animals. Politicians are interchangeable.

Don't you believe in the democratic process?

Yeah, but what's that got to do with politics? Politics creates more problems than it solves. It can be counter-productive. The real power is in the hands of small groups of people and I don't think they have titles.

H'mm.

Posted by Tom at 12:01 AM | Comments (0) |

April 1, 2009

The Wavering Rule of Law

So, because of prosecutorial misconduct, the Justice Department decides to move for dismissal of the political corruption case against former Alaska senator Ted Stevens (previous posts here and here).

Meanwhile, Jeff Skilling, who created billions of dollars in wealth and thousands of jobs by revolutionizing risk management of natural gas prices for producers and industrial consumers, sits in a Colorado prison cell under the weight of a barbaric 24-year prison sentence. Skilling's conviction involved even more egregious prosecutorial misconduct than the Stevens case. The criminal case against Skilling was materially weaker than the case against Stevens, too.

It is a sad reflection of the current state of American rule of law that the DOJ readily concedes prosecutorial misconduct against an arguably corrupt legislator, but ignores it in a shaky case against a businessperson who created many jobs and great wealth.

And how bizarre is it that America's primary business newspaper rightly decries the government's abuse of Stevens' due process rights but continues to ignore even worse abuses with regard to a creative and productive businessperson?

Update: Larry Ribstein chimes in, too.

Posted by Tom at 12:01 AM | Comments (1) |

March 30, 2009

Henderson on the Nature of Government

David Henderson makes an insightful point about the Ryan Moats/Robert Powell run-in in Dallas last week in which Powell (the policeman) exhibited an utter lack of common sense, much less prosecutorial discretion (and this incident is apparently not the first time that Powell has exhibited this type of behavior):

So what is the essence? The issue of control. Read the abridged transcript of the interaction or, better yet, watch the whole 20-minute video. What comes out loud and clear is that the policeman was upset because the driver, Ryan Moats, tried passionately to tell him the nature of the emergency, whereas what Robert Powell saw as being primary was that Moats wait patiently while Powell wrote him a ticket. Even once a nurse came out from the hospital and assured the policeman that Moats's mother-in-law was dying, Powell, writing the ticket, said, "I'm almost done." Must get that ticket written no matter why Moats jumped a red light. [.  .  .]

This is the nature of government whether the government employees are policemen with guns on their sides or sometimes in their hands or are teachers in government-financed schools. The whole Powell-Moats incident reminds me of a passage from Steven E. Landsburg's book, Fair Play: What Your Child Can Teach You About Economics, Values, and the Meaning of Life. Landsburg tells of the propaganda his daughter Cayley's teachers subjected her to about the importance of not letting the water run when she brushed her teeth. Landsburg writes:

[.  .  .]

Where is the pattern, then? What general rule compels us to conserve water but not to conserve on resources devoted to education? The blunt truth is that there is no pattern, and the general rule is simply this: Only the teacher can tell you which resources should be conserved. The whole exercise is not about toothbrushing; it is about authority.

The Moats-Powell incident is a micro example of the government's proclivity to exert power arbitrarily. That essential nature is being largely ignored as the Obama Administration runs headlong into seeking even greater governmental regulation over broad sectors of the economy.

Given that one of the clearest lessons of the 20th century is the capacity of large government to cause unspeakable evil, any effort to centralize more power in the federal government should be subject to the most careful scrutiny and not the type of superficial posturing that Congress has exhibited to date.

Count me as not confident that Congress will oblige.

Posted by Tom at 12:01 AM | Comments (1) |

March 28, 2009

Our Congress at work

I swear, you can't make this stuff up.

As regular readers of this blog know, I thought the federal bailout of AIG and various other Wall Street firms was a bad idea from the start because it prevented our bankruptcy system from allocating the risk of loss among the creditors of the financially-troubled firms.

Nevertheless, after various forces stoked a climate of fear, Congress approved broad bailout legislation even though it was clear at the time that few of the legislators understood what they were approving.

Not surprisingly, various large creditors of the financially-troubled firms did very well for themselves under the bailout legislation. Can't blame them for protecting their shareholders' interests, now can you?

So now, confronted with the fact that the bailout primarily benefited these large institutional creditors, various members of Congress and New York AG ("Attorney General" or "Aspiring Governor," take your pick) Andrew Cuomo are starting investigations into why AIG did precisely what it was supposed to do -- i.e., pay its bills -- with the bailout funds.

A little late, don't you think?

Posted by Tom at 12:01 AM | Comments (1) |

March 26, 2009

Losing the grip on AIG

The business blogosphere was abuzz yesterday over publication of AIG executive Jake DeSantis' remarkable resignation letter to AIG CEO, Ed Liddy.

But what was even more remarkable was the reaction of some commentators that makes abundantly clear that common sense often evaporates in the face of big money.

DeSantis is a longtime AIG executive who worked for one of AIG's profitable units. When AIG was going down the tubes last year because of losses incurred in the company's untethered CDS trading unit, DeSantis agreed to stay on at a nominal salary and continue making profits in his unit in return for a substantial, but not over-market, bonus.

Such arrangements are not unusual for financially-troubled companies and might very well have been arranged even had AIG gone into a chapter 11 reorganization rather than become the subject of an ill-advised government bailout. In short, it's a good thing for creditors of AIG -- including now U.S. taxpayers -- that the company retain people such as DeSantis who might make the company profitable and valuable again.

Or course, we all know what happened when AIG disclosed publicly that it had made the bonus payments to DeSantis and other AIG executives. They were demonized in a manner that has not been seen since Enron.

DeSantis' resignation letter lays this all out and notes the indisputable hypocrisy of AIG executives and government officials who knew about these compensation arrangements, but who flamed the public uproar rather than provide the quite simple and reasonable explanation for the bonuses.

I mean really. Who could argue that DeSantis and the other similarly-situated AIG executives were treated in an abominable manner?

Well, up to the plate steps one Brian Montopoli, a CBSNews.com political reporter, who establishes beyond any doubt that he needs to remain a political, rather than business, reporter:

Mr. DeSantis is not a plumber. He is a Wall Street executive who has made millions of dollars. And it’s safe to assume that most plumbers don’t believe he has gotten a bad deal, AIG scandal notwithstanding.

In essence, Montopoli reasons that other people are working just as hard as DeSantis and they would gladly trade places with him if they could have made as much scratch as he has earned over the years. Given that DeSantis made a lot of money while he was at AIG, Montopoli thinks he is "tone deaf" for pointing out the injustice of being unfairly demonized and cheated out of the compensation that was promised to him in return for staying on at AIG under extremely difficult circumstances.

In short, those evil capitalist roaders deserve most of our scorn and they should just shut the hell up.

In the face of such addled reasoning, it's hard to know where to begin. But let's start by pointing out that Montopoli ignores the rather important fact that no one has stopped him or anyone else from attempting to compete with DeSantis in his area of business and make just as much money as he has over the years. The reality is that there are relatively few people who do what DeSantis does well. That's why he commands a larger salary than most of us.

The fact that DeSantis makes more money than we do doesn't mean that it's OK to screw him out of his compensation or that he shouldn't be heard to set the record straight when such an injustice takes place.

Posted by Tom at 12:01 AM | Comments (9) |

March 12, 2009

The real March Madness

As I've noted many times, big-time college sports in the U.S. is structured in a corrupt manner, but it's an entertaining form of corruption that makes reform difficult (how would reform affect my team?).

That reality rears its rather unsavory head each March as the nation looks forward to the NCAA Basketball Tournament, in which predominantly young black males entertain us in return for legally-sanctioned, below-market compensation. Most of the players do not make it into the high-dollar dream world of the less-compensation restricted forms of professional basketball (the NBA and the other professional leagues), and many of the players do not even receive a real college education or graduate. Many end up with little other than a life of dealing with the after-effects of serious injuries.

To make matters even worse, as Andrew Zimbalist notes in this WSJ op-ed, most academic institutions lose their shirt attempting to compete in this entertaining form of corruption:

The annual three-week orgy of basketball, involving the nation's top 65 college teams, is once again upon us. March Madness they call it, and madness it is. [.  .  .]

So, a captivated national audience, a massive television deal and dozens of corporations drooling to get a piece of the action must all add up to a financial bonanza, right? Not quite.

There are a few winners. The National Collegiate Athletic Association, for instance, makes out quite well. Last year, Madness brought in $548 million from TV rights and an additional $40 million from ticket sales and sponsorships, together representing an eye-popping 96% of all NCAA revenue.

Amid this cornucopia, the schools themselves are usually the losers. According to the NCAA's latest Revenues and Expenses report, in 2005-06 the median Division I men's basketball team generated revenue of $480,000 and had operating costs of $1.33 million, yielding a net operating loss of $850,000. If capital expenses and full university overhead were included, these results would be even more dismal.

The most successful programs, of course, will do better (the top 10 basketball teams had revenues of more than $11 million), but even these programs frequently lose money when the accounting is done properly. Why?

Most of the 300-plus Division I schools aspire to make it to the March tournament. To do so, they have to spend big. Since they can't go to a free-agent market to hire the best high-school players, they attempt to attract them in other ways. First, they spend lavishly to court the players during the recruitment process.

Next, they attempt to provide state-of-the-art arenas and training facilities, complete with luxury suites, Jumbotron scoreboards and spacious locker rooms. They invest in academic tutoring facilities, costing as much as $15 million, to help the athletes stay eligible for competition. Then they hire well-known coaches with a reputation for sending an occasional player to the NBA.

And the coaches don't fare too shabbily either. In 2005-06, the head coaches of the 65 Division I teams in Madness had an average maximum compensation of $959,486, with the top paid coach earning a guaranteed salary of $2.1 million and a maximum salary of $3.4 million. These figures exclude extensive perquisites, including free use of cars, housing subsidies, country-club memberships, access to private jets, exceptionally generous severance packages, handsome opportunities for outside income, and more.

These guys are making almost as much as NBA coaches, even though their teams' revenues generally are below one-tenth those in the senior circuit. The trick, of course, is that the players aren't allowed to be paid, so the coaches, in essence, get the value produced by their recruits. It doesn't hurt that college sports benefit from state subsidies and federal tax exemptions, and that they have no stockholders looking for quarterly profits.

There is a better way.

Posted by Tom at 12:01 AM | Comments (1) |

March 11, 2009

Trampling Stanford

As most folks following the upfolding Stanford Financial Group scandal know by now, Laura Pendergest-Holt was the first Stanford executive arrested in connection with the scandal.

If only a few of the allegations contained in the motion below are true, it looks as if the Justice Department and the SEC are well on their way to trampling the Constitutional rights of Ms. Pendergest-Holt, R. Allen Stanford and the other targeted Stanford executives in a manner that we've seen before.

Posted by Tom at 12:01 AM | Comments (2) |

March 10, 2009

The Goldman Sachs bailout

Why do most pundits continue to characterize the billions of dollars that the federal government has loaned to AIG over the past six months as "the AIG bailout?"

As this WSJ weekend article and this subsequent Bloomberg article note, the funds that the Fed and the Treasury have loaned to AIG really bailout out Goldman Sachs and a number of other prominent banks, including some Europe's largest.

Thus, shouldn't we be calling this the "Goldman Sachs bailout?"

By now, we all know what happened. AIG sold credit default swaps that provided the buyer of the CDS with insurance against default on bonds and other credit instruments that the buyers held.

However, insurance is only as good as the financial capacity of the insurer to pay claims on that insurance. So, when it became apparent last summer that AIG had seriously blown the assessment of its risk in issuing CDS, the level of the credit risk that AIG had insured was well beyond its ability to pay potential claims on the CDS. That's not good news for a trust-based business.

Consequently, when bond defaults started hemorrhaging through the mortgage markets, the buyers of AIG's CDS -- namely Goldman and the Euro banks -- had a similar problem to AIG's. They had failed to assess the risk of doing business with their insurer accurately and they were facing huge losses on their CDS claims.

Well, under normal circumstances, that shouldn't have been any big deal to anyone other than parties involved. AIG would have been floundered into chapter 11, Goldman and the other big creditors would have assessed whether it made sense to reorganize the company or simply liquidate its constituent parts, the creditors would have converted their debt to equity in a new AIG or taken a haircut on their claims in return for receiving a portion of AIG's liquidation proceeds, everyone would have licked their wounds and the profitable parts of AIG's business would have emerged from bankruptcy with new owners highly incentivized to generate value for their ownership interest. That's the way markets have sorted out such errors in judgment for generations.

However, as we all know, that's not what has happened this time. Instead, after stirring up a climate of fear, the federal government -- led by supposedly free-market oriented Republicans -- paid Goldman and the Euro banks full price for the unsecured claims that they would otherwise be asserting against AIG in a chapter 11 case. The new Democratic administration doesn't appear to have any better understanding of what to do now that it is clear that the prior Administration's gambit has failed miserably.

It really is not rocket science. Larry Ribstein concurs.

The Financial Times' William Buiter summarizes the lesson that we all should learn from this:

The logic of collective action teaches us that a small group of interested parties, each with much at stake, will run rings around large numbers of interested parties each one of which has much less at stake individually, even though their aggregate stake may well be larger. The organized lobbying bulldozer of Wall Street sweeps the floor with the US tax payer anytime.

The modalities of the bailout by the Fed of the AIG counterparties is a textbook example of the logic of collective action at work. It is scandalous: unfair, inefficient, expensive and unnecessary.

Posted by Tom at 12:01 AM | Comments (4) |

March 6, 2009

Insightful thoughts to close the week

Writing in 1951 about popular attitudes toward income inequality in "The Ethics of Redistribution," Bertrand de Jouvenel observed the following (H/T WSJ):

The film-star or the crooner is not grudged the income that is grudged to the oil magnate, because the people appreciate the entertainer's accomplishment and not the entrepreneur's, and because the former's personality is liked and the latter's is not. They feel that consumption of the entertainer's income is itself an entertainment, while the capitalist's is not, and somehow think that what the entertainer enjoys is deliberately given by them while the capitalist's income is somehow filched from them.

In arguably the best financial blog post to date in 2009, the Epicurean Dealmaker analyzes the skewed dynamics that led to the Merrill Lynch high-level executive bonus pool and observes, among other things:

It would not be outlandish to consider the Merrill executives' bonus pool as the latest and largest campaign gift toward Mr. [Andrew] Cuomo's 2010 gubernatorial run.

Meanwhile, Andrew Morris wrote the following in a letter to the WSJ editor (H/T Don Boudreaux):

At first, when I read your headline “States give gambling a closer look” (Mar. 3) I thought you were reporting on yet another “stimulus” or “bailout” bill in which politicians played games of chance with taxpayers’ money. Hardly news -- just another “dog bites man” story.

Then I realized it was just a story about allowing ordinary people to risk their own money  --  now that’s a “man bites dog” story!

Along the same lines, the WSJ's Notable and Quotable series provided the following excerpt from Friedrich A. Hayek's "The Constitution of Liberty" (1960) on the illusory nature of progressive taxation and large increases in governmental spending:

Not only is the revenue derived from the high rates levied on large incomes, particularly in the highest brackets, so small compared with the total revenue as to make hardly any difference to the burden borne by the rest; but for a long time . . . it was not the poorest who benefited from it but entirely the better-off working class and the lower strata of the middle class who provided the largest number of voters.

It would probably be true, on the other hand, to say that the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off.

And Jason Kottke noted the technological irony of the week:

Now you can go to the iTunes Store to buy the Kindle app from Amazon that lets you read ebooks made for the Kindle device on the iPhone.

Finally, legendary Houston trial lawyer Joe Jamail passes along this anecdote about the late, great Houston criminal defense lawyer, Percy Foreman:

In the early 1980s, Jamail represented his courtroom idol, Houston criminal defense attorney Percy Foreman, whose neck was injured when his car was rear-ended by a commercial truck. On direct examination, Foreman testified that he had not experienced any neck problems before the accident, and that he was entitled to $75,000 for lost income due to the injury.

But on cross-examination, the defense revealed that Foreman had been hospitalized nine times for neck problems prior to this accident.

“The jury looked at me, expecting me to give them an answer,” says Jamail. “So I told them that Percy had been a great lawyer throughout his life, but that he was now just an old man and was growing senile.”

At that moment, Foreman jumped up and yelled out across the courtroom, “You goddamned son of a bitch!”

“See what I mean,” Jamail immediately told jurors. “He doesn’t even know where he is right now.”

The jury awarded Foreman the sum of $75,004. Jamail says he never figured out why the extra $4.

Posted by Tom at 12:01 AM | Comments (0) |

March 4, 2009

The Chron's last gasp?

With traditional newspapers folding left and right, it's no surprise that the newspaper business is no bowl of cherries these days. According to this WSJ Digits blog post, that uncertainty is prompting Houston's main daily newspaper -- the Houston Chronicle -- to consider some big changes:

Hearst said its newspapers plan to hold back at least some content from their free Web sites, launching the publisher onto the vanguard of print media companies to begin charging for their digital news and information.

A top executive at Hearst, which publishes 16 newspapers including the Houston Chronicle and Seattle Post-Intelligencer, said the company is mulling how much of its online offerings to keep free, while reserving some content exclusively for people who pay.

“Exactly how much paid content to hold back from our free sites will be a judgment call made daily by our management, whose mission should be to run the best free Web sites in our markets without compromising our ability to get a fair price from consumers for the expensive, unique reporting and writing that we produce each day,” Steven Swartz, the president of Hearst newspapers, said in a staff memo.

The text of the staff memo is included at the end of the blog post.

Meanwhile, financial blogger Felix Salmon, who has been following the newspaper website subscription issue for the past couple of years, thinks that the Wall Street Journal's website subscription model -- which is the business model that the Chron hopes to mirror -- is doomed to failure:

My feeling is that [WSJ editor Robert] Thomson was entirely right when he said that [news] commentary had become commoditized, and that therefore you couldn't charge for it; he also said the same thing about most news. But what he calls "specialized content" is to a large degree just taking commoditized news, and adding the kind of value that comes from informed commentators.

Yes, there are things which Dow Jones the WSJ can do and no one else can do in quite the same way -- Thomson was interesting when he started talking about selling content on the subject of India to Japan, for instance. And in a world where Dow Jones is looking to individual subscriptions to make up the losses from corporate subscriptions, it's going to be very difficult for them to start slashing those individual subscription rates to zero.

But I suspect that eventually the WSJ will do the math and work out that the best way to monetize and grow its large number of unique visitors is to maximize the time they spend on the site. And the best way to do that is to go free.

Give the Chronicle credit for taking risks in a battle for survival rather than simply fading away as many other newspapers are doing. However, I am not convinced that the Chron's pay-for-some-content approach has much of a chance of succeeding.

Frankly, the Chronicle simply does not appear capable of producing the type of specialized content that is necessary even to have a chance of generating the level of individual subscriptions that will be necessary for success.

For example, the Chron was inexplicably behind other major newspapers and blogs in its coverage of the recent Stanford Financial Group scandal. Its follow-up coverage really has not provided any meaningful content that cannot be found elsewhere from free news sources and blogs.

Moreover, even where the Chron indisputably takes the lead in regard to a local story of national interest -- such as the newspaper's excellent coverage of the various legal cases involving former U.S. District Judge Sam Kent or its amazing coverage of Hurricane Ike -- the information generated is still not sufficiently distinguishable from other free news sources so that readers will be likely to pay for the content.

Don't get me wrong. The Chronicle is not without talent. Tech columnist Dwight Silverman is one of the most-respected writers in his field. Science reporter Eric Berger does a fine job, and Todd Ackerman has done a first-rate job of covering the Medical Center for years. Ditto for Nancy Sarnoff in regard to local real estate. The Chron sports bloggers Stephanie Stradley, Lance Zierlein and Zac Levine provide better content and analysis than the Chron's sportswriters. I'm leaving others out who also do a fine job.

But is the specialized product that such talent generates sufficient to induce enough online readers to pay for content so that the Chronicle can transform itself into a profitable web-based news provider?

When even longtime Chronicle subscribers are seriously thinking about giving up their subscriptions, I have my doubts.

Posted by Tom at 12:01 AM | Comments (7) |

March 3, 2009

An uncivilized routine

Former Hollinger International chairman and CEO Conrad Black's daily routine these days is not quite as civilized as the one followed by Winston Churchill, wouldn't you agree?:

I get up just after 7 except on the weekends and holidays when it is possible to sleep in. I eat some granola and go to my workplace where I tutor high school-leaving candidates, one-on-one, though sometimes I have to deal with up to four at a time, around my desk, and talk with fellow tutors and other convivial people. I lunch around 11 with friends from education, work on e-mails, play the piano for 30 to 60 minutes, return to my tutoring tasks by 1, return to my unit at 3, deal with more e-mails, rest from 4 to 6, eat dinner in the unit then, and go for a walk in the compound or recreation yard for a couple of hours, drinking coffee well-made by Colombian fellow-residents, and come back into the residence about 8:30, deal with e-mails and whatever, have my shower etc., around midnight, read until 1-1:30 a.m. and go to sleep. On the weekends it is pretty open. [.  .  .]

The days and weeks tend to resemble each other. Time does go by quickly but a bit imperceptibly. I have quite a lot of e-mail and correspondence and limited telephone traffic. Essentially, I try to keep as well in touch with people and events as possible and I am lucky that many friends outside want to correspond. I psychologically live outside this facility most of the time.

Posted by Tom at 12:01 AM | Comments (1) |

February 28, 2009

The Price of Progress

As noted here last fall, one of the key dynamics that is delaying the recovery of financial markets is the resistance of many societal forces to allow the markets to allocate the risk of loss among the various investors in failed businesses.

Inasmuch as private capital will not invest in even a potentially viable business until that company's financial condition is likely to reward such an investment, the liquidation of unviable companies is an essential part of the process that has allowed market-based economies to generate the most wealth and jobs throughout modern history.

Despite the foregoing, the beneficial aspects of liquidating unprofitable businesses remains often unappreciated. A scene from the 1991 Norman Jewison film "Other's People Money" illustrates this truth wonderfully, first as Gregory Peck's character demonizes the forces of liquidation and then as Danny DeVito's "Larry the Liquidator" shatters the myths upon which such demonizing rests. Enjoy.

Posted by Tom at 12:01 AM | Comments (2) |

February 25, 2009

Greed in perspective

In market economies, people who create jobs and wealth often generate great wealth personally. During periods of market unrest, those wealthy folks are often demonized as being greedy.

During a period of economic malaise in1979, the late Milton Friedman counsels Phil Donahue on the vacuity of demonizing greed. Enjoy.

Posted by Tom at 12:01 AM | Comments (5) |

February 23, 2009

The Journal's curious case of myopia

Bully for the Wall Street Journal for running this editorial last week decrying the prosecutorial misconduct of the Justice Department in obtaining the conviction of former Alaska Senator Ted Stevens on ethics charges (Mike over at the Crime and Federalism blog has posted a copy of the defense motion describing the prosecutorial misconduct here).