Houston's Clear Thinkers

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.

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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.

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November 12, 2009

UPS vs. FedEx

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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."

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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.

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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.

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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?

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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.

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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.

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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?

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October 18, 2009

Colbert on the Stock Market

Colbert was on fire this week.

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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?

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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.

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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.

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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.

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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.

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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.

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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?

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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

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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?

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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.

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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 ):

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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.

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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?

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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?

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August 3, 2009

Unintended Consequences

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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.’

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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.

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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?

 

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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?

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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?

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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.

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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.

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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.

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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?

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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.

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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.

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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 the targeted Stanford executives in a manner that we've seen before.

Pendergest-Holt Motion to Set Aside Receiver #141

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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.

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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.

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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) | TrackBack (0)

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) | TrackBack (0)

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) | TrackBack (0)

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) | TrackBack (0)

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).

However, where was the nation's leading business newspaper when even more egregious prosecutorial misconduct was involved in criminal cases that the DOJ brought in regard to Enron, particularly the prosecution of Jeff Skilling?

Could it be that the Journal was invested in the DOJ's myth regarding Enron?

How ironic that the WSJ condemns prosecutorial misconduct with regard to the case against a politician, but largely ignores it in cases against businesspeople.

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

February 20, 2009

IMG's bad week

The late Mark McCormack must be spinning in his grave. His baby has had a very bad week.

McCormack was the attorney who parleyed his friendship with PGA Tour star Arnold Palmer to create the world's leading management firm for professional athletes and celebrities, International Management Group, now known as IMG. In addition to Palmer, McCormack represented such icons as Jack Nicklaus, Tiger Woods, Margaret Thatcher, Mikhail Gorbachev and Pope John Paul II, to name just a few.

McCormack died in 2003 after suffering a major heart attack and his shares in IMG were sold in connection with the administration of his estate. With his death, the oversight of IMG passed on to a new generation of managers led by über-agent, Ted Forstmann.

Well, that new generation of managers just hit a serious bump in the road.

First, although a relatively small deal, IMG suffered a disproportionate amount of horrendous national publicity over its handling of the contract negotiations of eccentric but successful Texas Tech football coach, Mike Leach.

Not only did IMG alienate the decision-makers at Tech to the point that the university seriously considered firing Leach, IMG's handling of the matter forced Leach to resolve the contract impasse himself in a face-to-face meeting with Tech's chancellor yesterday afternoon. What is Leach paying IMG for, anyway?

At any rate, Leach's resolution of the impasse over his contract at least saved IMG from facing the prospect of a $10 million-plus malpractice damage claim from Leach for fouling up the negotiations.

But it appears that IMG may not be as fortunate with regard to its relationship with the major business fraud of this week, Stanford Financial Group.

Check out this NY Post article (H/T Joe Weisenthal at Clusterstock):

The Post has learned that IMG quietly agreed to steer clients looking for investment advice to Stanford Financial Group, potentially exposing them to millions of dollars in losses resulting from the financial firm's alleged fraud.

According to three sources with knowledge of the situation, IMG and Stanford have a quid-pro-quo agreement under which Stanford Financial pays IMG a low- to mid-seven-figure consulting fee in exchange for IMG advising its clients - which include golfers Tiger Woods, Arnold Palmer, David Toms, Sergio Garcia and others - to have their money managed by Stanford.

The backroom bargaining has exposed IMG to charges of double-dealing, and is raising questions about where the firm's allegiances lay: with Stanford Financial or its athlete clients. [.  .  .]

IMG's deal with Stanford Financial involved the management firm advising the now-tarnished financial firm on where to spend sponsorship money, particularly related to golf tournaments.

Stanford's alleged fraud could cost IMG north of $10 million in fees, as well as any clients who got burned in the scandal.

For the time being, IMG is denying that it parked some of its clients' funds at Stanford in return for Stanford hiring IMG as a consultant. But IMG's denial raises as many questions as it answers, such as how did IMG's clients find Stanford if IMG didn't point them in that direction? You can rest assured that, if IMG was in fact consulting for Stanford while recommending that its clients invest money with the firm, IMG will probably just open up its pocketbook and reimburse those clients for any losses attributable to Stanford's demise.

Any other approach to the Stanford problem would be an even bigger public relations fiasco than what IMG has suffered over the Leach-Tech contract negotiations.

Frankly, regardless of whether IMG had a consulting deal with Stanford, that IMG may have recommended that at least some of its clients invest funds with Stanford raises serious questions about the firm's judgment. As noted earlier here, the Houston business community widely-knew for years that any investment in Stanford was an extremely risky bet.

IMG's immediate and vehement denial of any conflict of interest in regard to Stanford and its other clients reflects that it is taking this problem seriously. We all know what happens when a trust-based business loses the trust of the market.

Posted by Tom at 12:01 AM | Comments (1) | TrackBack (0)

February 18, 2009

Stanford blows up

Well, that certainly didn't take long, now did it?

As noted here this past Sunday, Stanford Financial Group has been well-known around Houston as a smoke-and-mirrors investment outfit for quite awhile. Joe Weisenthal over at Clusterstock has the best overview of Stanford's collapse, while Felix Salmon does a good job of summarizing the SEC complaint and asking the right questions about the principals of the firm. The Chron's Kristen Hays and Tom Fowler provide the local angle here.

Meanwhile, the Chronicle's business columnist Loren Steffy bemoans the fact that government regulators -- who have been investigating Stanford for at least the past four years -- were again behind the knowledge curve in protecting investors from Stanford's apparent investment fraud.

However, Steffy's expectations are simply misplaced. A government regulatory body will rarely be as effective or efficient as the information marketplace in preventing or mitigating investment fraud loss. Had the investors in Stanford relied on Houston's information market in deciding on whether to invest in the company, they wouldn't have needed the "protection" of government regulation.

Posted by Tom at 12:01 AM | Comments (1) | TrackBack (0)

February 16, 2009

What are Leach and IMG thinking?

This earlier post noted the fascinating contract dispute that has arisen between Texas Tech University and the most successful coach in the school's history, Mike Leach.

Now, with the university and Leach at loggerheads, and a university-imposed February 17th deadline looming to get a deal done on a proposed modification and extension of Leach's contract, the real issue ought to be this -- why has IMG, Leach's agent in these negotiations, allowed the negotiations to reach impasse?

Well, it probably is not all IMG's fault because Leach has a law degree and is likely highly-involved in the negotiations. But one has to wonder about the judgment of the agent and the coach who would allow a five-year, $12.7 million contract go up in smoke over a few contractual details that simply should not be deal breakers.

To put this in perspective, the contract that Tech has offered Leach is one of most lucrative in big-time college football, almost certainly one of the top 10 or 15 contracts in terms of compensation. What makes that all the more remarkable is that Tech -- with a relatively modest athletic budget of a bit less than $50 million a year -- is not close to being one of the most lucrative football programs in college football. By way of comparison, Texas' annual athletic budget is over $100 million and Oklahoma's is about $75 million.

In short, a distinct possibility exists that the eccentric Leach will never receive another offer as lucrative as Tech's current one in his coaching career. How on earth is Leach -- who is a good but not great coach -- thumbing his nose at that kind of scratch?

In short, because IMG and Leach don't like several contractual details of the university's proposed contract. For example, IMG and Leach want it to be relatively inexpensive for another program to swoop in and hire Leach away from Tech. Not surprisingly, Tech wants it to be relatively expensive for another program -- at least during the first three years of the new deal -- to hire Leach away from Tech.

Similarly, Tech doesn't want to have to pay an arm and a leg to buyout Leach's contract if it wants to make a change, while IMG wants Tech to pay Leach a buyout equal to 40% of the remaining compensation due Leach under the contract at the time Tech elects to fire him.

The other two issues are so minor that they barely merit mentioning. First, Tech wants Leach to pay a penalty of $1.5 million if he interviews with another school during the term of the contract without Tech's consent. The other issue is that Tech wants to have any outside income that Leach arranges approved by Tech and run through the athletic department.

Having been involved in a few of these rodeos, here's why I think IMG and Leach are foolish if they allow this potentially lucrative deal to evaporate on Tuesday.

First, it's simply not unreasonable for Tech -- which does not have a particularly wealthy football program -- to hedge its risk of losing Leach to another program by requiring a substantial buyout of the contract. The purpose of such a buyout is to allow Tech to mitigate its loss by using the buyout funds to hire a good coach to replace Leach. Moreover, the amount of Tech's proposed buyout will not deter a bigger program that really wants Leach. IMG and Leach ought to recognize this reality, negotiate the least amount of buyout that they can, and move on.

The buyout of Leach is the toughest issue, but not all that difficult to resolve. IMG's 40% proposal, particularly during the early years of the contract, is unrealistic given the size of Tech's resources, so they should come off those amounts. On the other hand, Tech's proposal for the buyout in the later years of the contract is relatively paltry, so Tech should come up considerably on those amounts. By both sides giving a bit in those areas, a deal can be reached.

The other two problem provisions are easily resolvable. On the outside compensation issue, Tech has to regulate that income under NCAA regulations, so requiring Leach to obtain Tech's approval is not an unusual or unreasonable demand. Leach and Tech should simply agree that Tech will have the right to approve any such outside comp and that such approval will not be withheld unreasonably. For his part, Leach should agree that he will report and account to Tech for all such outside income so that Tech can comply with its obligations under NCAA regulations.

Finally, Tech would probably waive the proposed $1.5 million penalty if Leach would simply agree that he won't interview for another job during the term of the contract without Tech's approval, which Tech should agree would not be unreasonably withheld. Then, if Leach were to do so anyway, Tech could elect to fire Leach for cause, which means that it wouldn't have to pay him anything further under the contract. That would resolve that issue.

So, if the foregoing is all that it would take for Leach to become a multi-millionaire, then why are IMG and Leach thumbing their noses at Tech's attractive offer?

The only answer I can come up with is that sometimes pride and emotion really can overwhelm good judgment during the heat of negotiations.

Having said that, I still think cooler heads prevail and a deal gets done. There is simply too much for Leach to lose by not doing so. Leach may be eccentric, but he is not stupid.

And IMG didn't become the world's most successful agents by recommending that their clients reject very lucrative contracts.

Posted by Tom at 12:01 AM | Comments (2) | TrackBack (0)

February 15, 2009

Houston's Madoff?

The mainstream media has finally begun to notice the unusual circumstances surrounding the Houston-based investment firm, Stanford Financial Group (the latest Chronicle story is here).

Although the firm characterized the various investigations as "routine" in news reports, believe me -- it's never "routine" when the FBI starts nosing around. This is doubtful to end well for Stanford and its investors.

But what's most remarkable about all this is how long it has taken for the media and regulators to catch on to Stanford. It took blogger Alex Dalmody less than 30 minutes to size up the situation, and it didn't take Felix Salmon (update here) much longer.

Meanwhile, this Business Week article reports that the SEC has been investigating Stanford for the past three years!

Interestingly, I've asked dozens of folks in Houston investment community about Stanford over the years and have never once heard one vouch that an investment in the firm would be a good idea except as an absolute flyer. Nevertheless, I cannot recall even one media article over the years examining how Stanford was supposedly paying its lucrative returns to investors. Sure, the firm advertised well and contributed money to a number of powerful politicians. But I kept hearing from competent investment folks -- exactly how is the firm paying those kinds of returns on CD's again? And then there was that whole false association thing with the late Leland Stanford of Stanford University. How could anyone really take this outfit seriously?

Well, as recent news reports indicate, apparently about 30,000 investors did just that.

Now, it appears that many of these investors are from Central and South America, so maybe those investors didn't have ready access to the information about Stanford that was available in Houston. But the important point here is that -- as with Bernard Madoff -- no regulatory agency is ever going to do a better job than the information market in preventing or mitigating fraud loss. I mean really, can you imagine how an investor who bought a Stanford CD during the past three years is feeling toward the SEC right now?

Thinking that the government can prevent a slick con man from fleecing investors is about as rational as investing one's life savings with Stanford Financial Group.

Posted by Tom at 12:01 AM | Comments (16) | TrackBack (0)

February 9, 2009

A couple of questions regarding the proposed soccer stadium

The always-entertaining Houston real estate blog, Swamplot, provided this post last week with typically pretty pictures from a KHOU-TV video of the long-proposed soccer stadium for the Houston Dynamo MLS soccer team.

Have we really been talking about this for almost two years now?

At any rate, now that the City of Houston and Harris County have committed a total of $25-30 million to the deal, and the City is on the hook for millions more in infrastructure improvements, Dynamo management is publicly representing that it is prepared to contribute another $80 million to build the stadium.

Now, I'm never seen the Dynamo's financial statement, but my guess is that it generates between $10-15 million in revenues. Maybe that increases by 30-40% if the club gets its own stadium. A nice small business, but .  .  .

In these lean economic times, what bank is going to take the lead in loaning $80 million to a business that would have to dedicate a substantial amount of its revenue base just to pay debt service on the loan?

Is this a bankable deal? Or just pie-in-the-sky absent the local governments coughing up substantially more dough?

Inquiring minds want to know.

Posted by Tom at 12:01 AM | Comments (2) | TrackBack (0)

February 8, 2009

Is Leach worth it for Tech?

A fascinating dispute between Texas Tech football coach Mike Leach and Texas Tech University highlights the tension in the relationship between the business of big-time college football and academia.

According to this Examiner.com article (a more-detailed Don Williams/Avalanche Journal article is here and a Double-T Nation blog post is here), Leach and Tech have agreed on the financial terms of an extended contract, but are hung up over several issues relating to termination and buyout of the contract, including Tech's demand that Leach agree to pay the school $1.5 million if he interviews for another head coaching job without Tech's permission.

Thus, despite Leach being Tech's most successful football coach, Tech isn't all that secure about Leach. And despite Leach's success at Tech, Leach isn't all that thrilled about being at Tech, which is evidenced by his continually seeking other head coaching jobs. Tech apparently thinks that Leach's wanderlust makes Tech look bad, so Tech is seeking to restrain Leach's efforts to obtain another job by making it expensive for him to do so. However, by making such a demand, Tech reinforces to Leach that he really would prefer to be somewhere else.

So, Tech is caught in a conundrum. On one hand, Leach has generated profitable attention for Tech; thus, it makes sense to pay big money to keep him. However, on the other hand, Leach turns around and disparages Tech in the coach marketplace by continually trying to leave. Why pay big money to someone who is diminishing the value of your product?

Nevertheless, Tech is probably over-thinking this issue. Leach is a good coach, but not the best diplomat. Pay him a salary commensurate with Tech's financial capability and Tech's position in the Big 12, and then require a hefty buyout to compensate Tech if another program hires Leach. Don't worry much about Leach's wanderlust -- a large buyout will deter most programs from pursuing Leach. Trying to restrict Leach's wanderlust by imposing a penalty is counterproductive in that it forces Tech to endure a coach who really does not want to be there while reducing the chance that Tech will realize a windfall from another program hiring Leach and paying Tech the buyout.

Having said all that, is Leach really worth it for Tech? Could Tech's program do about as well with another (and likely, far less expensive) coach who is truly content with his position at Tech?

It sure would be refreshing to see Tech decide to find out.

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

February 2, 2009

Sound thoughts to start the week

 Felix Salmon:

It may or may not be true that we would have avoided much of this crisis had credit default swaps never been invented. I suspect it's not true, and that the CDS market, in allowing people to short the credit market, actually helped at the margin to stop the credit bubble from expanding. But even if it is true, that doesn't mean that the solution is to ban or unwind the CDS market which now exists. It was foolish to sell protection too cheaply on risky debt; it was sensible to buy that protection when it was cheap. So let's not punish the sensible people and bail out the foolish ones by abrogating those contracts.

Peter Gordon:

"Animal spirits", Keynes' view of capitalists, reeks of detachment and some condescension. Trouble is no one really knows how to incite the barnyard or rattle the cage. The past six months of ad hoccery have not helped and I am pessimistic about the next chapter, guessing that whatever comes out of the Washington sausage factory will do more harm than good. Bad times do breed bad policy. And there is now very little sympathy for getting the taxman (and the politician) out of the way.

Gordon again:

There are some very smart people who claim that desperate measures are called for. But desperate measures can also make matters worse. Printing money to finance questionable projects that enrich lobbyists, empower bureaucrats and entrench politicians is surely not a promising signal to investors here or abroad.

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

January 26, 2009

Making bad policy

It sure is getting hard to keep up with all the rules involved in determining whether an important person gets prosecuted for an alleged business crime.

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

Next, there was the Buffett Rule.

And then we had the GM Rule.

Now, Larry Ribstein reports that we have the Geithner Rule.

None of which is likely to help Wachovia's Bob Steel, who the SEC apparently believes violated the obligation to throw in the towel.

Does anyone really believe that all these rules and the criminalization-of-business lottery constitutes a coherent policy for regulating questionable business deals?

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

January 25, 2009

Can Mayor White pull off another "win-win" deal?

Although the developers of the proposed Ashby high-rise condominium project didn't know it at the time, Houston Mayor Bill White did the developers a huge favor by putting up roadblocks to that project.

Can you imagine trying to peddle those condos in the current real estate market? Mayor White's blocking of the condos ended being a classic "win-win" deal.

Accordingly, I wonder if Mayor White might be inclined to do the same thing in regard to Houston's proposed soccer stadium?

Things aren't looking too rosy for MLS soccer these days:

Major League Soccer is not quite ready to carry its own night on TV.

After two years of anemic ratings that started low and finished lower, ESPN executives decided to cancel the league’s regular Thursday night telecast on ESPN2 this season.  .  .  .

“We didn’t see the kind of ratings climb we’d like to, so we’re trying something different,” said Scott Guglielmino, ESPN vice president of programming.

The decision to cancel the regular Thursday night game marks a stunning turnaround for a league that two years ago believed it was creating destination programming that would increase interest in MLS. But even the 2007 arrival of David Beckham couldn’t boost MLS ratings.

MLS games averaged a 0.2 rating and 289,000 viewers on ESPN2 in 2007. Those numbers dropped to 0.2/253,000 viewers the following year. Its highest rating during that period was Beckham’s second regular-season game in August 2007 that earned a 0.6/658,000 households.

Canceling “MLS Primetime Thursday” is a tacit admission that MLS is not strong enough to anchor a regular prime-time slot on its own. ESPN is entering the third year of an eight-year rights deal that pays MLS $8 million annually.

So, MLS franchises are being downgraded by the most important sports programming network in the nation, which can't be good for the value of those teams. The attendance at MLS games is poor, at least outside Houston and a couple of other cities. And the perception in sophisticated soccer circles is that the MLS is decidedly minor-league.

Meanwhile, Mayor White has already had Houstonians invest $20 million or so in buying downtown property at a premium price for the proposed soccer stadium, despite the fact that the city already owned nearby property that would have been perfectly fine for such a stadium. Moreover, the city will be on the hook for tens of millions of dollars more in infrastructure improvements if the Dynamo owners somehow cobble together their private financing for the stadium.

Now, it's looking as if the Dynamo may not even have a viable league to play in by the time the proposed soccer stadium is completed in a couple of years.

Pull the plug on the soccer stadium, Mayor. It will be another "win-win" deal.

Posted by Tom at 12:01 AM | Comments (8) | TrackBack (0)

January 20, 2009

Reality Bites

This earlier post made the following point about folks who lost their entire nest egg by investing it with Bernard Madoff:

Although nothing is wrong with compassion for folks who lose money in an investment fraud, it's important to remember that those investors who lost their nest egg in the Madoff implosion were imprudent in their investment strategy. They should have diversified their Madoff holdings or done some real due diligence into his operation if they were going to bet the farm on it. Even though every one of Madoff investors carry insurance on their homes and cars, one can only speculate why they didn't attempt to understand the risk of their investment in Madoff's company better than most did. Most likely, many of the investors simply did not care to truly understand how Madoff claimed to create wealth for them in the first place.  .  .  .

It's easy to throw Madoff in prison for the rest of his life, simply attribute the investment loss to him and pledge to do a better job of policing the crooks next time. It's a lot harder to understand how Madoff's investors could have hedged their risk of Madoff's fraud. As this WSJ editorial concludes, "expecting the SEC to prevent a determined and crafty con man from separating investors from their money is no more sensible than putting your life savings with a Bernard Madoff."

Professor Antony Davies of Duquesne University in Pittsburgh makes an analogous point in this W$J letter-to-the-editor (H/T Don Boudreaux) about folks who are calling for increased regulation because of losses incurred in their 401(k) retirement accounts:

In the article "Big Slide in 401(k)s Spurs Calls for Change" (page one, Jan. 8), 35-year-old project manager Kristine Gardner says in response to the 44% drop in her 401(k) last year: "There's just no guarantee that when you're ready to retire you're going to have the money."

Newsflash: Higher returns are the compensation for incurring risk, and lower returns are the price of safety. Ms. Gardner's 401(k) would have been completely safe had she shifted her investment allocations into money markets. As money markets yield a paltry 1%, Ms. Gardner's real complaint isn't that 401(k)s are unsafe, but rather that financial markets require her to incur risk in exchange for being compensated for incurring risk.

Retirement consultant Robyn Credico claims that "This is the biggest test that the 401(k) plan has seen . . . and it has failed." Au contraire, 401(k) plans have worked exactly as designed. It is the workers (and their retirement consultants) who have failed.

There is only one reason why the average person close to retirement should have lost 50% of his 401(k): incompetence. Most workers at that age should have long since shifted the bulk of their 401(k)s into bonds and money markets. The 401(k) is a powerful investment tool but can be dangerous when abused.

If you aren't willing to put forth the effort to learn the principles of investing, that's your choice. But don't hobble the rest of us by asking for government regulation of a tool that works perfectly well just so that you can be spared the effort of figuring out how to use it.

As with the security theater in our nation's airports, increased regulatory control over retirement investment is a fake safety net. It will not protect retirement savings (check out the solvency of the Social Security system if you don't believe that), and the "protection" of increased regulation will lead many investors to believe that they still do not need to understand the best ways to create wealth and hedge risk in their retirement accounts.

Indulging ignorance is generally not a good reason for increasing governmental power.

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

January 19, 2009

An entertaining upcoming week in Houston

No one in Houston this week can complain about lack of opportunity for intellectual stimulation.

First, well-known legal blogger and Clear Thinkers favorite Larry Ribstein will be lecturing on Thursday afternoon from noon to 2 p.m. at the University of Houston Law Center as the first speaker of the semester in UH Law Professor Lonny Hoffman's “Colloquium” course that brings noted legal scholars from around the country to UH each year to give presentations on the scholar's work in progress.

Great teachers are a popular topic on this blog (see here and here), so I'm particularly pleased that Professor Ribstein is taking the time out of his busy schedule to visit Houston. As regular HCT readers know, Professor Ribstein is one of the premier business law scholars in the country.

The holder of the Mildred Van Voorhis Jones Chair at the University of Illinois College of Law, Professor Ribstein's widely-read Ideoblog has been at the forefront of the blawgosphere's enormous impact on legal analysis and education, literally pushing legal scholarship from what had been mostly closed conversations between fellow academics into a hugely valuable resource that is now readily available to anyone over the Web. Already the leading expert in the U.S. in the area of unincorporated business associations, Professor Ribstein is also one of the blawgosphere's most insightful thinkers on corporate governance issues and the effects of regulation on markets and business. His blog has contributed as much to the understanding and appreciation of business law issues over the past five years as any resource of which I am aware.

Professor Ribstein's talk on Thursday will be on this paper that he co-authored with George Mason University law professor Bruce Kobiyashi that examines the empirical factors that influence limited liability companies' choice of where to organize. Seating for the talk is limited, so contact Professor Hoffman at Lhoffman@central.uh.edu or 713.743.5206 as soon as possible to reserve a seat. The lecture will be held in the Heritage Room of the UH Law Center.

Meanwhile, on Wednesday from 11:30-1:30 p.m., popular author and journalist Malcolm Gladwell will be giving a talk on his new book, Outliers, at the Hilton-Americas Houston hotel (Chron article here). Tickets are $75 and include a copy of the book and the luncheon, which is co-sponsored by Inprint, the Greater Houston Partnership and Brazos Bookstore. Contact Jill Reese at 713.844.3682 or jreese@houston.org to make reservations, the deadline for which is noon on Tuesday.

Finally, author and former Houstonian Larry McMurtry -- the pre-eminent Texas writer of the past 30 years -- will be giving the lecture on Wednesday evening from 7-8:00 p.m. in Rice University's Distinguished Lecture series. The lecture will be held in the Grand Hall of Rice's Ley Student Center and is open to the public.

Posted by Tom at 12:01 AM | Comments (1) | TrackBack (0)

January 15, 2009

Fertitta calls off bid to take Landry's private, but takes it private, anyway

Suffice it to say that it's been an interesting past year and a half for Houston-based Landry's Restaurants Inc., which owns restaurants such as Landry's, Rainforest Cafe, Charley's Crab, The Chart House, and Saltgrass Steak House, as well as the Golden Nugget Hotel & Casino in Las Vegas and Laughlin, Nev.

The saga started in late 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.

That offer seemed all well and 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, the following month, 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, 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, Fertitta lowered his offer to $13.50 per share.

Then, on Monday of this week, the company announced that it was terminating the proposed deal with Fertitta. The company 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. The company is negotiating with those same lenders to refinance the bond indebtedness that the company promised to refinance in connection with October, 2007 litigation settlement 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 deal rather than risk that the lenders would declare a default for breach of confidentiality and back out of the financing commitment for the buyout, as well as the negotiations on the refinancing of the bond indebtedness.

Oh yeah, amidst all this, Landry's stock closed at $6.54 per share today.

Meanwhile, what has Fertitta been doing while his take-private bids have languished and the company's stock has plummeted to historic lows?

He has been buying more Landry's stock. So much so that he now controls 56.7% of the company's shares.

That's right. Landry's board failed to obtain a standstill agreement from Fertitta while his buyout offers were pending over the past year.

As Steve Davidoff notes, this is "truly worthy of Deal From Hell status." Loren Steffy has the same take.

While Landry's directors are checking on the amount of the company's D&O policy, I wonder whether Landry's lenders will follow through on the refinancing negotiations for the bond indebtedness in light of the market's hammering of Landry's share price?

If that refinancing doesn't happen, then those bondholders who Landry's sued back in August of 2007 will likely not be easy for the company to deal with.

In that case, maybe Fertitta's additional purchases of Landry's stock won't look so smart after all.

Stay tuned.

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January 8, 2009

Another Angry Mob

The Fifth Circuit's decision yesterday reminded us of the angry mob that lynched Jeff Skilling.

Now, as this timely Roger Parloff/Fortune article notes, an even larger mob is gathering to lynch the businesspeople who were attempting to save their companies in the wake of last year's financial meltdown on Wall Street:

The level of fury surrounding these inquiries is of a different order from what we saw with, say, the backdating scandals or the Enron and WorldCom failures. Today's credit collapse has already vaporized about $9 trillion in investment capital, while ripping another trillion in assorted bailout money from the pockets of enraged taxpayers - also sometimes known as "jurors."

Based on the Fifth Circuit's Skilling decision, those targeted businesspeople would be wise not to rely on the courts for protection from the mob.

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December 30, 2008

Those pesky unexpected consequences

On the heels of this post from a couple of days ago that addressed Tyler Cowen's recent NY Times op-ed that speculated that expectations generated from the 1998 government bailout of Long Term Capital Management hedge fund were not such a good thing, this W$J article on the Lehman Brothers bankruptcy case bemoans the enormous cost attributable to lack of reorganization planning in connection with the Lehman Brothers case:

As much as $75 billion of Lehman Brothers Holdings Inc. value was destroyed by the unplanned and chaotic form of the firm's bankruptcy filing in September, according to an internal analysis by the company's restructuring advisers.

A less-hurried Chapter 11 bankruptcy filing likely would have preserved tens of billions of dollars of value, according to a three-month study by the advisory firm, Alvarez & Marsal. An orderly filing would have enabled Lehman to sell some assets outside of federal bankruptcy-court protection, and would have given it time to try to unwind its derivatives portfolio in a way that might have preserved value, the study says. [.  .  .]

"While I have no position on whether or not the federal government should have provided further assistance to Lehman, once the decision was made not to provide further assistance, an orderly wind-down plan should have been pursued. It was an unconscionable waste of value," said Bryan Marsal, co-chief executive of the advisory firm who now serves as Lehman's chief restructuring officer.

Mr. Marsal estimates that the total value destruction at Lehman will reach between $50 billion and $75 billion, once losses from derivatives trades and asset impairment are combined.

Losses are a natural part of the risk allocation that occurs in big reorganization cases. But anyone who has been involved in such cases knows that it takes at least a couple of months to prepare a big reorganization case properly.

Friends who are closely involved in the Lehman Brothers case have confided to me that Lehman CEO Richard Fuld never in his wildest imagination thought, after the precedent of Bear Stearns, that the Fed and the U.S. Treasury would fail to bail out Lehman Brothers. When that proved wrong, Lehman Brothers had to file its chapter 11 case on a relatively unplanned, emergency basis. That miscalculation cost creditors even more than they would have lost had Lehman's management taken the normal step of planning the case when they saw the writing on the wall. I've got my doubts that the additional losses are $50-75 billion as suggested by the consultant's report (could the Lehman-related parties be using that report as a liability shield?), but there is little question that an emergency bankruptcy filing generally costs creditors more than a properly planned one.

As John Carney notes, maybe the conventional wisdom is wrong that the Fed made matters worse by failing to bailout Lehman Brothers.

It's hard enough to evaluate the risk of insolvency in regard to a trust-based business under normal circumstances. It becomes a real crapshoot when there exists an expectation that the federal government will provide stop-gap financing for a big trust-based company's losses. And crapshoots generate some pretty bad risk-taking.

It really isn't rocket science.

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December 28, 2008

Lessons of LTCM

Marginal Revolution's Tyler Cowen makes a similar point in this NY Times op-ed about the 1998 federal bailout of the Long-Term Capital Management hedge fund that this earlier post made about Enron and the current Treasury bailout:

At the time, it may have seemed that regulators did the right thing [in bailing out LTM]. The bailout did not require upfront money from the government, and the world avoided an even bigger financial crisis. Today, however, that ad hoc intervention by the government no longer looks so wise. With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed — as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed. [ .  .  .}

The major creditors of the fund included Bear Stearns, Merrill Lynch and Lehman Brothers, all of which went on to lend and invest recklessly and, to one degree or another, pay the consequences. But 1998 should have been the time to send a credible warning that bad loans to overleveraged institutions would mean losses, and that neither the Fed nor the Treasury would make these losses good.

Absent allocation of risk consequences to the parties who entered into transactions with financially-troubled companies, markets have a difficult time accurately pricing risk in regard to future investment and transactions. Such indecision plays a big part in delaying recovery in financial markets.

Similarly, without cleaning up the balance sheets of troubled companies (and putting the hopelessly insolvent ones out of their misery), extending additional credit to financially-strapped companies only makes them an even poorer risk for investment. That doesn't facilitate recovery in the financial markets, either.

Amidst many blunders, the Bush Administration's failure to tap corporate reorganization experts in connection with its policy-making regarding the financial crisis was one of the worst. Hopefully, Obama's advisors note the mistake and correct it in the next Administration.

Update: Barry Ritholtz agrees with Tyler and me.

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December 24, 2008

Playing fair

So, now Alaska Senator Ted Stevens is finding out that some federal prosecutors do not play fair (H/T Doug Berman). Of course, we've known that for quite some time down here in Houston.

Oh well, at least the mainstream media has strong incentives to expose such abuses in the case of a major political figure.

But do the same media incentives exist in the prosecution of a wealthy and unpopular businessperson?

What if the reporter most responsible for such a prosecution is, might we say, not particularly motivated to expose prosecutorial abuses? Or what if the reporter for the nation's most prominent business newspaper is so conflicted that he ignores the abuses even when they are playing out in front of him?

And the foregoing doesn't even consider what we should think when one of those reporters in another case actively attempts to help investors score on their positions at the expense of a company and its chief executives.

It's hard enough to maintain innocence against the overwhelming resources of the federal government when the prosecution plays fair. It's next to impossible to do so when it doesn't. What chance is there if the people responsible for exposing prosecutorial abuse have incentives that override that responsibility?

Ask Jeff Skilling.

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December 23, 2008

Enduring Gladwell?

Charlie Rose interviews Malcolm Gladwell in the video below in regard to his new book Outliers, but it does not appear that the Financial Times' Clive Cook will be watching:

Since the first chapter of “Tipping Point” I have been enduring Gladwell out of an increasingly weary sense of professional obligation. This is what they pay me to do, I tell myself. The man has a nose for interesting tales, I grant you, but his unfailing combination of intellectual parasitism, credulity, false modesty, and self-importance repels me. In “Tipping Point”, “Blink” and those of his New Yorker pieces I have read, the formula is always the same: find a scholarly opinion; sanctify said opinion with Gladwellian approval (transforming it from a disputed theory to something “we now know”); season with Madison Avenue terms of art; then deluge with anecdotes of questionable, if any, relevance. And let there be colour. Always, the colour. Please tell me about that man’s wry smile, interesting foreign accent, and cluttered desk (often, as studies show, the sign of a creative mind). I need to know all that.

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December 20, 2008

Any connection?

As Bill Henderson notes, many big law firms are going to have trouble surviving in these turbulent financial markets.

Financial markets aside, though, I wonder whether this type of news is an even larger part of big law's problem?

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December 19, 2008

Wallstrip does Cramer on Wall Street

Posted by Tom at 12:01 AM

December 18, 2008

Making sense of Madoff

Loren Steffy, the Houston Chronicle's business columnist, has been having a hard time lately.

You will recall that Steffy was one of the leaders of the mainstream media lynch mob that embraced the myth of the Greed Narrative in calling for harsh criminal prosecutions of former Enron executives, particularly the late Ken Lay and Jeff Skilling.

However, now that pretty much the same thing that happened to Enron has happened to Bear Stearns, Freddie and Fannie, Merrill Lynch, Lehman Brothers, AIG and any number of other trust-based businesses during the current financial crisis, Steffy has had difficulty making sense of it all. We can't just throw all of those executives in prison, can we?

Now to make things even more confusing for Steffy, Bernard Madoff's alleged Ponzi scheme has unraveled. Steffy's column from yesterday bemoans that Madoff, as with Enron, was at least in large part the result of lax regulation:

And so the era of lax regulation that began with Enron ends with the Madoff madness looming as a monument to the SEC’s ineptitude. Already under fire for smelling the flowers while Bear Stearns — to cite one example — charged toward collapse, the SEC’s days may be numbered. Treasury Secretary Henry Paulson introduced a sweeping reform plan earlier this year that would relieve it of much of its oversight role.

But wait a minute. The SEC had been continually warned about Madoff's company (see Henry Markopolos' 2005 notice to the SEC here). Moreover, the "lax regulation" that Steffy complains about came at a time of unparalleled growth in the SEC during the supposedly pro-business Bush Administration:

Since 2000 and especially after the fall of Enron, the SEC's annual budget has ballooned to more than $900 million from $377 million.  .  .  . Its full-time examination and enforcement staff has increased by more than a third, or nearly 500 people. The percentage of full-time staff devoted to enforcement -- 33.5% -- appears to be a modern record, and it is certainly the SEC's highest tooth-to-tail ratio since the 1980s. The press corps and Congress both were making stars of enforcers like Eliot Spitzer, so the SEC's watchdogs had every incentive to ferret out fraud.

Yet, the regulators couldn't put the pieces of the puzzle together (even Spitzer's family was a victim of Madoff!). So, Steffy's solution is the SEC "needs to be put out to pasture." In other words, rearrange the deck chairs on the Titanic.

Look, as J. Robert Brown and Larry Ribstein point out, there are understandable systemic reasons why Madoff was able to slip through the regulatory cracks for decades. Most of those flaws are not going to be fixed by simply creating a Super-SEC. Indeed, the suggestion that such regulatory remedies are the best protection against the next Madoff (and, rest assured, there will be many) actually is counter-productive to understanding the truly best protection from such schemes.

The primary justification for this regulatory retrofitting is the plight of the innocent investors (and it sure is an interesting bunch) who lost millions when Madoff's company went bust. Although nothing is wrong with compassion for folks who lose money in an investment fraud, it's important to remember that those investors who lost their nest egg in the Madoff implosion were imprudent in their investment strategy. They should have diversified their Madoff holdings or done some real due diligence into his operation if they were going to bet the farm on it. Even though every one of Madoff investors carry insurance on their homes and cars, one can only speculate why they didn't attempt to understand the risk of their investment in Madoff's company better than most did. Most likely, many of the investors simply did not care to truly understand how Madoff claimed to create wealth for them in the first place. Chidem Kurdas' speaks to this dynamic in his timely study on the demise of the Manhattan Capital hedge fund:

As the failure of the hedge-fund firm Manhattan Capital demonstrates, both government regulators and market players can make mistakes resulting from cognitive biases. Responding to such mistakes by strengthening government watchdogs, although often recommended, reduces both the watchdogs’ and the public’s incentive to learn, thereby creating a vicious spiral of regulation, regulatory failure, and even more regulation.

Thus, as Larry Ribstein has been advocating for years, no amount of increased regulation is likely ever to do a better job than the market in mitigating fraud loss. It's easy to throw Madoff in prison for the rest of his life, simply attribute the investment loss to him and pledge to do a better job of policing the crooks next time. It's a lot harder to understand how Madoff's investors could have hedged their risk of Madoff's fraud. As this WSJ editorial concludes, "expecting the SEC to prevent a determined and crafty con man from separating investors from their money is no more sensible than putting your life savings with a Bernard Madoff."

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December 17, 2008

A tuna wins a small lottery prize

As a result of the Buffet Rule, the federal government decided to land a bunch of tuna rather than the barracuda in regard to an AIG-General Re finite risk insurance transaction that was not clearly illegal, much less criminal.

Subsequently, after convicting the business executives (sort of like shooting tuna in a barrel these days), the federal prosecutors proposed that the tuna get effective life sentences. For what?

Thankfully, a federal judge in Connecticut showed unusual restraint on Tuesday in rejecting the government's brutal behavior. He handed the first of the tuna to face sentencing a two-year prison term.

Meanwhile, former Enron executive Jeff Skilling continues serving an effective life prison sentence in Colorado pending his appeal after being convicted (although not fairly) for pretty much the same thing as the tuna above.

So, during a financial downturn when we need to be promoting our best and brightest to be engaging in the business risks that generate jobs and wealth, our federal government continues promoting its corporate criminal lottery.

Why would the best and brightest risk that?  Do any investors really feel safer now that Skilling is off the streets? And does anyone really think that keeping Skilling locked up for most of the rest of his life will deter the next Bernie Madoff?

A truly civil and wise society would find a better way.

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December 13, 2008

That's a solution?

As Congress and the mainstream media continue their muddle over the current downturn in financial markets, one of the ubiquitous "solutions" that Washington and the MSM have already decided is needed to prevent another such disruption is more and better governmental regulation of those markets.

Thus, it was with great interest that I read this W$J article today about the meltdown of Bernard Madoff's apparent Ponzi scheme:

Bernard Madoff is alleged to have pulled off one of the biggest frauds in Wall Street history. But there were multiple red flags along the way, including a series of accusations leveled against Mr. Madoff's operation. Now some are asking why regulators and investors didn't pick up on the alleged scheme long ago.

"There were multiple smoking guns of various calibers," says Harry Markopolos, an industry executive who in 1999 first contacted the Securities and Exchange Commission with his suspicions. "People were willfully blinded to the problems, because they wanted to believe in his returns." [.  .  .]

Mr. Markopolos, who years ago worked for a rival firm, researched the strategy and was convinced the results likely weren't real. "Madoff Securities is the world's largest Ponzi scheme," Mr. Markopolos wrote in a letter to the SEC. Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the agency, according to documents he sent to the SEC that were reviewed by The Wall Street Journal. An SEC spokesman declined to comment.

In short, the regulatory agency that is supposed to protect investors has been warned about Madoff's fund since 1999 and has done nothing.

Meanwhile, Marcia Vickers and Roddy Boyd write in this Fortune article about the troubles of Citadel Investment Group, the Chicago-based hedge fund that manages $15 billion and has 1,300 employees worldwide, which announced yesterday that it has frozen withdrawals through March:

The panic that swept through the capital markets after Lehman declared bankruptcy was one form of human frailty that Citadel’s sophisticated mathematical models could never have anticipated. The second and perhaps more devastating one occurred on Wednesday, Sept. 17, when news broke that the Securities and Exchange Commission was considering a temporary ban on short-selling 900 stocks - 799 of them financial stocks.

The proposed ban was good news for the banks and brokers. It meant that Morgan Stanley (MS, Fortune 500), Citigroup (C, Fortune 500), and others didn’t need to worry that hedge funds could drive them to the brink.

Yet the news was horrifying for hedge funds like Citadel. Scores of Citadel’s positions - particularly in convertible arbitrage, which requires shorting - would simply blow up if the ban went into effect.

According to sources, Griffin phoned Christopher Cox, the SEC’s chairman. Griffin pleaded with Cox, telling him the ban could mean certain death to many hedge funds - including Citadel. Cox, according to these sources, was unmoved and merely responded with the party line about how the country was going through a national financial crisis and the SEC needed to do what it had to.

There was nothing Griffin could do or say to sway him, and on Friday, Sept. 19, the ban was made official. (The SEC declined to comment for this story.)

Citadel was now hemorrhaging money. Over the weekend and throughout the following week, Griffin talked with his portfolio managers and told them to dump the dogs and keep the racehorses, meaning preserve the positions that they believed had long-term upside as they engaged in a selloff.

By the end of September, Citadel’s funds were down 20%. In early October, Griffin sent a letter to investors stating that September had been the “single worst month, by far, in the firm’s history. Our performance reflected extraordinary market conditions that I did not fully anticipate, combined with regulatory changes driven more by populism than policy.”

So, let me get this straight. The CEO of a huge hedge fund calls the SEC chairman to protest that responsible businesses that have hedged risk properly are going to suffer huge, unfair financial losses as a result of the SEC's dubious, knee-jerk temporary ban on short-selling. And the best that the SEC chairman can come up with is that "the SEC needed to do what it had to"?

Go ahead and toss Chairman Cox in with this group.

Finally, almost unnoticed amidst all this turmoil is this piece of news that the Federal Trade Commission is inexplicably continuing to fight Whole Foods' merger with natural food competitor, Wild Oats, despite the fact that it is now pretty darn clear that Whole Foods overpaid for Wild Oats, that Whole Foods isn't doing all that well right now, and that the grocery business generally continues to be brutally competitive.

So, in light of all this, even more regulation is the solution?

As Larry Ribstein points out, that "solution" could well make things worse.

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December 11, 2008

Would you buy a car from Congress?

The W$J's Holman Jenkins continues what should be Pulitzer Prize-winning commentary on the problems of the U.S. auto industry:

None of [Congress' complicity in the auto industry's problem] was mentioned at four days of congressional bailout hearings, because Detroit knows better than to suggest Congress has a role in the industry's problem.   .   . 

.   .   . The tragedy of GM and Ford is that, inside each, are perfectly viable businesses, albeit that have been slowly murdered over 30 years by CAFE. Both have decent global operations. At home, both have successful, profitable businesses selling pickups, SUVs and other larger vehicles to willing consumers, despite having to pay high UAW wages.

All this is dragged down by federal fuel-economy mandates that require them to lose tens of billions making small cars Americans don't want in high-cost UAW factories. Understand something: Ford and GM in Europe successfully sell cars that are small but not cheap. Europeans are willing to pay top dollar for a refined small car that gets excellent mileage, because they face gasoline prices as high as $9. Americans are not Europeans. In the U.S., except during bouts of high gas prices or in the grip of a Prius fad, the small cars that American consumers buy aren't bought for high mileage, but for low sticker prices. And the Big Three, with their high labor costs, cannot deliver as much value in a cheap car as the transplants can.

Under a law of politics, such truths were unmentionable in last week's televised circus because legislators are unwilling to do anything about them. They won't repeal CAFE because they fear the greens. They won't repeal CAFE's "two fleets" rule (which effectively requires the Big Three to make small cars in domestic factories) because they fear the UAW. They won't hike gas prices because they fear voters. [.  .  .]

We hate to admit it, but the only good idea from the bailout debate is the proposal for a new "auto czar." Along with disposing of Chrysler and downsizing Ford and GM, his job should be to confront Congress with its own policy cowardice and failure. If saving gasoline and Detroit are both worthy goals, let's ditch CAFE and institute a gasoline tax to make consumers value the cars government is forcing auto makers to build. If Congress doesn't have the tummy for that, at least ditch the "two fleets" rule so Detroit can import small cars to meet the mandate.

Alas, Barack Obama's vaunted "change" apparently doesn't include spending the political capital to make Congress acknowledge the failure of CAFE. If he can't do better than throw taxpayer money at a dismal policy disaster like our fuel-economy regulations (and so far he seems to be joining Congress in pretending it's all Detroit's fault), we might as well give up on his presidency along with any hope of progress on the nation's other unresolved dilemmas.

His campaign never really answered the question of whether he was Chance the Gardener or Abraham Lincoln. We might as well find out now.

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December 3, 2008

"That's just not us"

While General Motors is making its case in Congress for an $18 billion bailout (didn't GM need "just" $12 billion last week?), it's trying to cut corners in other areas, such as its endorsement deal with Tiger Woods that paid Woods $7 million annually over the past nine years.

As one sage headline writer put it -- "GM lays off Tiger Woods."

But Conan O'Brien had an even better crack about GM's termination of its relationship with Woods during one of his monologues last week:

"General Motors announced that they are ending their endorsement deal with Tiger Woods. When asked why, a spokesperson for General Motors said: 'Tiger Woods is successful, competitive, and popular. And that’s just not us.'”

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November 21, 2008

A typical budget meeting these days

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November 19, 2008

Progress on the bailout front?

So, less than two months after this previous post noted that chapter 11 reorganizations with possible government financing of reorganization plans were the best tools to shake out the current financial crisis, even the NY Times (here and here) is promoting that approach for restructuring the Big Three automobile companies.

I guess that's a sign of real progress.

Funny how the way we typically handle such things in the civil justice system usually is the most efficient solution to the problems.

It sure beats having this bunch fumble around looking for an alternative solution.

By the way, I've mentioned this before, but it merits passing along again. One of the best ways to keep up on developments in regard to the current financial crisis is to check in frequently on the following sites: Clusterstock, Dealbreaker, and Felix Salmon.

The blogosphere rules!

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November 18, 2008

Thinking about markets

Now that folks have had at least a bit of time to reflect on the financial crisis on Wall Street, some good historical perspectives are starting to pop up, such as this Niall Ferguson Vanity Fair piece (previous posts on other Ferguson works are here). Toward the end, Ferguson makes an excellent point about market economies that is not widely understood:

The modern financial system is the product of centuries of economic evolution. Banks transformed money from metal coins into accounts, allowing ever larger aggregations of borrowing and lending. From the Renaissance on, government bonds introduced the securitization of streams of interest payments. From the 17th century on, equity in corporations could be bought and sold in public stock markets. From the 18th century on, central banks slowly learned how to moderate or exacerbate the business cycle. From the 19th century on, insurance was supplemented by futures, the first derivatives. And from the 20th century on, households were encouraged by government to skew their portfolios in favor of real estate.

Economies that combined all these institutional innovations performed better over the long run than those that did not, because financial intermediation generally permits a more efficient allocation of resources than, say, feudalism or central planning. For this reason, it is not wholly surprising that the Western financial model tended to spread around the world, first in the guise of imperialism, then in the guise of globalization.

Yet money’s ascent has not been, and can never be, a smooth one. On the contrary, financial history is a roller-coaster ride of ups and downs, bubbles and busts, manias and panics, shocks and crashes. The excesses of the Age of Leverage—the deluge of paper money, the asset-price inflation, the explosion of consumer and bank debt, and the hypertrophic growth of derivatives—were bound sooner or later to produce a really big crisis.

In short, markets are imperfect and sometimes quite messy. But they have stood the test of time in proving more efficient than the alternatives. Don't give up on them just yet.

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November 14, 2008

Ghosts of Enron

Ken Lay was prosecuted to death for promoting Enron even though he had a reasonable basis for believing that what he was saying about his company was true.

Fast forward a couple of years. Yesterday,  the W$J reported (NYTimes here) that General Motors may not be able to avoid bankruptcy because of political problems involved in obtaining a bailout loan package from the federal government. GM is "rapidly burning through cash reserves as car sales plummet and their access to credit tightens. GM has warned it may run out of money within months without outside help."

From what I can tell, no one is calling for the scalp of GM CEO Rick Wagoner because of confident public statements that he made just a few months ago about his company.

So, the corporate crime lottery continues. A truly civilized society would find a better way.

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November 13, 2008

Can you spare $350 million?

And you think the Texans' season is going badly?

Get a load of what Dallas Cowboys owner Jerry Jones is facing, and I'm not talking about whether to fire head coach Wade Phillips (H/T Brad Humphreys):

Industry watches as Cowboys look for loan

The Dallas Cowboys are seeking to borrow $350 million by Dec. 1, according to numerous finance sources, in one of the worst credit environments in the nation’s history.

The club’s proposed deal would refinance $126 million the team borrowed last year through the now-imploded auction-rate securities market, as well as add new debt to cover cost overruns at the team’s $1.2 billion stadium that is set to open next year, the sources said. [.  .  .]

For the Cowboys, getting out from underneath the auction-rate debt is a pressing concern. They are one of four NFL teams to have borrowed from the auction-rate securities (ARS) market, a market that allowed companies to borrow cheaply and continue to reset the interest rate with auctions of the debt weekly and monthly.

In February, the ARS market seized up, and debt auctions failed, which automatically triggered significant interest rate hikes. [.  .  .]

The Cowboys estimated the stadium would cost $650 million when they announced the project in 2004. With $350 million of public funding and $76 million from the NFL, it looked like a choice deal for the team.

The club arranged to borrow at least $450 million through Banc of America Securities for its portion, with the first $126 million through the ARS market. But Jones agreed to cover cost overruns as part of the team’s share, and like many stadiums in this period, the price has spiraled.

H'mm. I wonder whether the Cowboys will apply for a portion of the TARP fund, too?

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November 9, 2008

Checking up on Krispy Kreme

The folks over at WallStrip update us on the mercurial Krispy Kreme.

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November 6, 2008

Remember that hotel deal you invested in?

This post from over a year ago reviewed the absurdly highly-leveraged deal that Blackstone Group LP was proposing to make for Hilton Hotels. That deal was a head-scratcher even during the heady days of easy money.

As this W$J article from yesterday notes, the deal ended being structured with "only" $20 billion in bank debt rather than $25 billion (with Blackstone pitching in $6 million in equity), but that really didn't change the fundamental of the deal much. Hilton is projected to generate $2 billion in before-tax cash flow this year, which is enough to cover the $1.3 billion in interest expense on the bank debt. But cash flow is probably going to decline next year because of depressed demand for hotel rooms and Hilton will probably be forced to use its liquidity reserves to make up for any cash-flow short-fall.

Blackstone paid for Hilton at about 13 times estimated 2008 pretax cash flow. Similar public hotel companies are currently trading at about seven times their projected before-tax cash flow for 2008. The WSJ article quotes an analyst on the situation: "It's very difficult to assume any equity if you have to mark to market those assets. But they may argue it's a long-term investment for them." Make that a very long-term investment.

But as bad as this deal looks for Blackstone, it looks even worse for the seven banks that put up the $20 billion in financing. They are, as the WSJ puts it tactfully, "struggling" to sell pieces of the debt package in the current strained credit markets.

Gee, I'm sure glad we steered clear of that investment debacle, huh? Except that we apparently didn't:

[I]t now looks like U.S. taxpayers are on the hook to Hilton's fortunes, too. That's because when J.P. Morgan Chase & Co. in March took over Bear Stearns, the Federal Reserve assumed $30 billion of Bear's illiquid assets. Part of those loans and securities is Bear's $4 billion unsold portion of the $20 billion Hilton financing package, according to people familiar with the matter.

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November 1, 2008

Lacking appreciation for capitalism

Comedian Louis CK sums it pretty well:

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October 31, 2008

The Prince of Regulation

Get a load of the letter that New York Attorney General Andrew Cuomo, the new Prince of Regulation, sent to about ten Wall Street firms the other day:

We believe that the Board of Directors is most appropriately positioned to respond to our requests as the firm's top management likely has a significant interest in the size of the bonus pools. In this new era of corporate responsibility we are entering, boards of directors must step up to the plate and prevent wasteful expenditures of corporate funds on outsized executive bonuses and other unjustified compensation.

As my Office has told AIG, now that the American taxpayer has provided substantial funds to your firm, the preservation of those funds is a vital obligation of your company. Taxpayers are, in many ways, now like shareholders of your company, and your firm has a responsibility to them.

Accordingly, we also ask that the Board inform us of the policies, procedures, and protections the Board has instituted that will ensure Board review of all such company expenditures going forward. Please provide this Office with an accounting of the actions the Board plans to take that will protect taxpayer funds.

So, Cuomo charts the same political course as Eliot Spitzer before him and Rudy Giuliani before Spitzer. Embrace the Greed Narrative and then sit back and let the mainstream media do the rest. Before you know it, even both major presidential candidates tout the myth that business failure is always about dastardly villains and innocent victims.

My question for Cuomo and his mainstream media minions is quite simple: What is the likely quality of the management and board members who are willing to stick around and put up with Cuomo's grandstanding?

My bet is that you won't see many Hank Greenbergs.

Meanwhile, those less-than-stellar management teams all have tickets to feed at the Fed's money trough.

Ah, the webs we weave.

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October 28, 2008

Placebo Nation

In light of this NY Times article reporting that half of American doctors responding to a nationwide survey regularly prescribe placebos to their patients, I pass along the following business opportunity, courtesy of the ever-clever Dr. Boli:

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October 25, 2008

Different directions

Newspapers are under siege. This Henry Blodget post reports on the continuing financial deterioration of the New York Times, which looks to be in real trouble.

Meanwhile, the blogosphere continues to thrive. For example, this Stephanie Stradley post about the chronically under-performing Houston Texans defense is far more insightful than anything that I've read in years from the cheerleaders, er, I mean, reporters who cover the Texans for the Houston Chronicle, which continues to layoff employees by the droves.

And to think that one of those Chronicle cheerleaders -- whose most recent piece is this fawning salute to the manager who was mainly responsible for blowing the 2003 NL Central pennant for the Stros -- had the audacity to defame Stradley recently.

Any wonder why newspapers and the blogosphere are going in different directions?

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October 23, 2008

Stossel's Politically Incorrect Guide to Politics

If you didn't have the opportunity to watch or record it last Friday, then watch the following six YouTube segments of John Stossel's Politically Incorrect Guide to Politics when you have the time (the other five segments are below the break). The program is television at its best presenting and analyzing key issues involving government regulation of business and the impact of that regulation on the creation of jobs and wealth. Enjoy:

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October 21, 2008

Security theater

While considering the abject vacuity of the presidential candidates' positions on the major issues this election season, I started thinking about some minor issues that might make a difference in my vote.

For example, if either major candidate came out in favor of dismantling the "security" apparatus that the federal government has foisted upon us to make airline travel an aggravation, at best, and an ordeal most of the time, then that candidate would probably get my vote.

Alas, neither candidate has proposed such a dismantling.

Nevertheless, don't miss this clever-but-serious Jeffrey Goldberg/Atlantic.com article on the utter uselessness of the Transportation Safety Administration's airport security procedures (prior post here).

Inasmuch as the only two airport-security measures that really matter -- fortified cockpit doors and the awareness of the flying public as to what a hijacking can mean -- have been in place virtually since the attacks of September 11, 2001, Goldberg zeroes in on the wasteful airport security process that we have allowed the TSA to impose on us at a substantial direct cost and an even greater indirect one.

Moreover, that process does virtually nothing to discourage serious terrorist threats. Rather, the inspection process is "security theater" that simply makes a few naive travelers feel safer about airline travel.

Finally, if all that weren't bad enough, the worst news is that once a governmental "safeguard" such as the TSA apparatus is adopted, few politicians are interested in dismantling it even when it's clear that process is ineffective, expensive and obtrusive.

That's food for thought as we get ready to endure implementation of the next round of governmental regulation of business.

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October 18, 2008

The shame!

You know things are really getting bad in the financial markets when FT.com's always-lively Dear Lucy column (previous post here) receives the following letter from an investment banker:

"At a dinner party last Saturday I was asked by a fellow guest what I did and I said I was an investment banker. I might as well have said I was a paedophile. Suddenly the whole table – all friends of my wife from the art world – turned on me with such venom I was really taken aback. I tried to defend myself by saying that I had nothing to be ashamed of in the work that I do in M&A, but the more I argued the more hostile the other guests became."

"Next time this happens – and I fear there will be a next time – should I accept guilt for what isn’t my fault, or should I lie and say I’m a librarian?"

Investment banker, male, 42

Among the many entertaining reader comments to the letter were the following:

"Bit surprised you were invited to dinner in the first place."

"Confess and beg for another glass of wine."

"A sensitive investment banker……….. whatever next?"

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October 14, 2008

Refracting Enron myopia

One of the more entertaining aspects of the current Wall Street financial crisis has been reading how some of the business columnists have been interpreting it.

Take, for example, Houston Chronicle business columnist, Loren Steffy. You may remember him from his acerbic coverage of the trial of former Enron executives, Jeff Skilling and the late Ken Lay, or his perpetuation of the Enron Myth regardless of the circumstances.

Dismissing me as an Enron apologist, Steffy regularly disputed my long-held theory that the run-on-the-bank that felled Enron could well happen to any trust-based business.

Apparently confused by the fact that what happened to Enron has now happened to Bear Stearns, Freddie and Fannie, Merrill Lynch, Lehman Brothers, AIG and any number of other trust-based businesses impacted by the current credit crunch, Steffy reaches for insight from one of the fellows who set the stage for this mess:

Investigators are poring over the failed firms, looking for signs that executives misled shareholders. Some evidence may be found, but Sam Buell, the former prosecutor who led the effort to indict Enron's Jeff Skilling, doesn't think we'll see widespread prosecutions.

"It's not a conspiracy if everybody's in on it," said Buell, who's now a law professor at Washington University in St. Louis. "In order to have a fraud conspiracy, you've got to have some effort by one group to deceive another group."

In this case, individual investors may not have understood what Wall Street bankers were doing with complex debt securities, but those charged with safeguarding the marketplace were certainly aware.

Regulators knew and approved. So did credit rating agencies. And auditors, both internal and external. With a mouse click, investors could find public documents that described the debt instruments with hundreds of pages of detail. [.   .   .]

"If everybody's in a bubble mentality, if they're betting the price of real estate will keep going up, disclosure doesn't address the problem of what happens when all those assumptions turn out to be wrong," Buell said. "Everybody knows what they're doing. They're just making bad decisions."

Yes, you read that correctly. Buell implies that Skilling was guilty of criminal conspiracy because not "everybody" was "in on it" at the time Enron was making its supposedly opaque disclosures. However, since "everybody's in on it" now, Buell doesn't think there will be widespread prosecutions because "[i]t's not a conspiracy if everybody's in on it."

With such reasoning, is there any doubt now why this outfit generated this record?

For the record, I actually hope Buell is right this time that few businesspeople are prosecuted for misjudging business risk. But for a more rational explanation of how financial regulation fits into the current crisis, check out these Larry Ribstein posts here, here and here and this masterful one by Arnold Kling.

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October 12, 2008

Stone and the capitalist roaders

Don't miss Larry Ribstein's post on Oliver Stone's financing philosophy in regard to his new movie about George W. Bush -- W -- the trailer of which is below:

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October 11, 2008

230 years?

So, the Justice Department is seeking a sentence of 230 years for former General Re senior counsel Robert Graham, a 60-year old man who has never been involved in any wrongdoing in his life.

Mercifully, the pre-sentencing report recommends a sentence of "only" 12-17 years.

Graham was convicted earlier this year of securities fraud in connection with his involvement in a finite risk transaction between General Re and AIG that was one of the transactions that led to the downfall of former AIG CEO, Hank Greenberg (prior posts here).

Ironically, AIG is now fighting for its life -- even after receiving loans from the Fed in amounts approaching $150 billion -- as a result of thousands of transaction decisions that were far more questionable than the one Graham made.

230 years. For involvement in a transaction that was not even clearly improper, much less criminal in nature.

230 years. As a result of a prosecution that required application of the Buffett rule.

230 years. What does that portend for the AIG executives who engaged in this bit of bad judgment? Or those who were involved in this? Did they commit a crime because they breached an obligation to throw in the towel?

This is our government doing such things, folks. It is a reflection of us. And that reflection is not particularly attractive these days.

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October 9, 2008

Say what?

As noted earlier here and here, the lack of leadership involved in the current credit crisis and related Treasury bailout really has been appalling. You don't think so? Check this out:

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October 3, 2008

Following up on my concierge health care experience

This post from about a year ago explored the reasons why my friend and personal physician -- internist Bill Lent, MD -- decided to convert his internal medicine practice to a concierge practice in which he limited his practice to 600 patients who pay $1,500 per year to retain his services. Inasmuch as I am blessed with good health, the only time I see Bill in most years is for my annual physical, which was this past week. As always, it was good to catch up with him and hear his thoughts about the first year of a concierge practice.

In short, Bill's experience has been overwhelmingly positive. The funds generated through his patients' retainer payments have relieved Bill of the financial pressure that had been mounting over the past decade to increase patient visits as Medicare and private medical insurers systematically reduced the amount paid to doctors for such visits. Released from that pressure, Bill is now able to spend more time with each patient, which Bill believes provides the patient with better quality service. The response from Bill's patients has been uniformly positive.

Although Bill's workload has been reduced from the standpoint that he no longer feels compelled to see more and more patients to maintain revenue levels in the face of reduced insurance payments, Bill has had to spend quite a bit of time over the past year in the process of computerizing his patients records. Part of the deal for patients in signing up for the concierge service is that their records are digitized so that the patient, Bill or any other doctor who the patient retains can review the records from anywhere via the Web. That perk has required a considerable expenditure of effort over the past year in digitizing those records, but now that the process is largely complete, Bill will spend far less time in future years as he simply amends a patient's computerized record with each visit.

There have been a number of pleasant surprises in Bill's first year of the concierge practice. For example, Bill was initially concerned that a number of his less affluent patients would opt not to participate because of the retainer payment. Surprisingly, however, his patient base has remained quite diverse from a socioeconomic standpoint -- even a large number of his elderly patients on Medicare elected to participate despite the fact that Medicare doesn't cover any of the retainer payment.

One of those is a long-time patient who is a retired bus driver with a host of medical problems that Bill has helped control for years. Rather than taking the risk of moving on to another physician, the retired bus driver's five children decided to split payment of the retainer between themselves so that their father could remain one of Bill's patients.

But the most pleasant aspect of the concierge practice is that Bill is back to doing what he loves to do -- taking the requisite amount of time to visit with patients about their symptoms and then diagnosing the nature of the problem. He no longer feels rushed to complete a patient visit so that he can move on to the next patient in an effort to fill his quota for the day.

Bill did have one foreboding experience in the transition to a concierge practice. Being the kind of fellow that he is, Bill offered at no cost to his former patients who opted out of the concierge practice to help them find another internist to replace him as their personal physician. Many of Bill's former patients took him up on his offer and he accommodated each of them. However, in so doing, Bill discovered that a growing number of internists and family practitioners in the Houston area are no longer accepting patients on Medicare because of the economic constraints of taking on such patients. As the number of primary care physicians continues to decline across the country, where are patients on Medicare going to find a primary care physician if this trend continues?

So, one of Houston's best internists was successful in saving his practice from the perverse impact of America's Byzantine health care finance system. As I noted in the previous post, if such entrepreneurial spirit can succeed in reviving a doctor's practice in the current highly-regulated health care finance system, then imagine what might happen if we unleashed the power of the marketplace to reform the health care finance system and the delivery of health care, as well?

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October 2, 2008

Another cost of the bailout

As reconsideration of the proposed Treasury Bailout of Wall Street takes center stage in Washington, other pressing and arguably more important problems continue to be ignored.

Take the chronically dysfunctional American health care finance system. This Boston Globe article reports that Massachusetts' supposedly innovative 2006 health insurance mandate has caused such a shortage of primary care physicians in the state that the wait to see such a doctor has grown to as long as 100 days. In addition, almost half a million citizens are having a difficult time finding a doctor at all:

"There were so many people waiting to get in, it was like opening the floodgates," [Dr. Kate] Atkinson said. "Most of these patients hadn't seen the doctor in a long time so they had a lot of complicated problems." She closed her practice to new patients again six weeks later. "We literally have 10 calls a day from patients crying and begging," she said.

On the other hand, maybe its better that Congress is distracted from such problems. As a friend of Don Broudreaux observes:

"The one good thing that came out of this whole credit debacle, I now have the perfect pithy response to all the lefties who tell me that the government should take over health care and make it affordable to everyone.  You mean the way they made home ownership affordable to all through Fannie and Freddie?  How did that work out for you?"

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October 1, 2008

Awkward Loan Interview

The proposed Treasury bailout leads to an awkward loan interview:

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September 30, 2008

This is leadership?

I've already said my piece on the proposed Treasury Bailout of Wall Street, so I won't belabor that view.

In the meantime, there are much better places to keep up with the minute-by-minute political developments on the proposed bailout -- for example, check out Clusterstock, DealBreaker and Felix Salmon for astute and up-to-the-minute analysis.

However, one point from my previous post deserves further review -- that is, circumstances such as this provide us with a revealing view of our political leaders. Do they inspire positive and collaborative action in difficult times for the better good of society? Or do they attempt to generate support for their political position through fear-mongering and demagoguery?

In my view, President Bush's handling of the negotiations over the proposed bailout has been abysmal. As Jeff Matthews points out:

The President’s unfortunate choice of words—"this sucker could go down"—carry the same deer-in-headlights quality as his televised speech to the American people last week, in which he used the word “panic,” as we recall. At a minimum, it makes you nervous; at a maximum, it makes you want to throw up first and sell everything second.

What happened to the heroic, forward-looking rhetoric great leaders are supposed to provide in times of crisis?

FDR gave us “We have nothing to fear but fear itself.”

Churchill gave us “We shall fight on the beaches.”

George Bush cruises in with “This sucker could go down.”

We wonder: has a more irresponsible sentence been uttered, by anyone, during this entire crisis?

John Carney reports that President Bush wasn't any better today in responding to the House's rejection of the proposed bailout:

"We put forth a plan that was big because we got a big problem," Bush just said, sitting in a chair placed before a fireplace in the White House. He's meeting with advisers, he said. "I'm disappointed with the vote in Congress," the president said.

Was that his version of FDR's famous fireside chats? Bush looked annoyed he was being bothered with this stuff.

This from a President who failed to persuade more than a third of his own party members in the House for his position in response to a financial emergency?

Meanwhile, proving that dubious leadership is bipartisan, Democratic House Speaker Nancy Pelosi provided us with a lesson on how not to win support for a position:

Finally, Tina Fey didn't even need to change any of Sarah Palin's words to drive home the point that John McCain certainly didn't bolster his lack of financial and economic acumen with his running mate selection:

Update: More "leadership."

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September 24, 2008

The Treasury Bailout is not rocket science

The debate over the proposed Treasury bailout of Wall Street firms is coming at a fortuitous time -- the election season. Be wary of any candidates who, after looking appropriately concerned about the dire predictions of the plan's promoters, throw up their hands and vote in favor of the bailout because "we just have to do something" even if they don't understand what they are doing.

The fear mongering that the promoters are using to sell the bailout is laughable. This is not rocket science.

For example, when Enron tanked in late 2001, it was the seventh largest public company in the U.S. Enron traded derivatives and other financial instruments with counterparties that were among Wall Street's biggest commercial and investment banks, which were heavily exposed to its losses. To make matters worse, these investments were concentrated in the energy sector, which is at least as important to the nation's economy as the housing sector that is at the center of the current crisis.

In short, at the time of its bankruptcy, Enron was one of the nation's largest publicly-owned companies, a vitally-important market-maker in the natural gas trading industry and a leader in hedging corporate risk through structured finance transactions.

Despite the huge wealth destruction that would result from Enron's insolvency, not one government or Wall Street leader proposed a bailout of Enron in order to preserve the huge value to the public of the natural gas trading industry and the market for structured finance transactions.

Enron's bankruptcy proceeded to cause enormous tremors through various industries -- particularly the energy industry -- because valuable resources for hedging risk of loss had evaporated seemingly overnight. The natural gas trading industry nearly fell apart completely, costing companies and their customers untold billions of dollars that they otherwise could have saved through hedging risk of loss. Similarly, the market for many structured finance transactions dried up, also costing companies another valuable avenue for hedging risk.

However, the nation's financial system did not break down. Companies adjusted to the changed circumstances and endured their additional costs as best they could. Markets also adjusted. Slowly but surely, both the natural gas trading industry and the market for structured finance transactions rebounded so that both are again providing companies with valuable alternatives for hedging risk and saving money.

Now, the tables are turned on Wall Street. Rather than facing the consequences of their risk-taking decisions in chapter 11, Wall Street's politically well-connected leaders are weaving their tales of doom for the overall economy to compliant governmental leaders who are only too willing to do their bidding.

In reality, each of these Wall Street firms should be required to endure the same thing that Enron and its creditors did -- a chapter 11 reorganization where equity gets wiped out and creditors either take a haircut on payment of their debts or convert their debt to equity in a reorganized firm that emerges from bankruptcy with a cleaned-up balance sheet.

That process ensures that investors and creditors who undertook the risk of investing or dealing with the bankrupt firms share the losses of their risk-taking. Moreover, it allows the firms that really are worth saving (as opposed to simply liquidating) to emerge from bankruptcy with an improved financial condition that should provide the firm with an enhanced opportunity to create wealth again.

What the bailout plan proposes to do is insulate investors and creditors from risk of loss by having the government -- funded by taxpayers such as you and me -- undertake that risk. There is simply no moral justification for foisting that risk on taxpayers and the only possible practical justification is that sorting all of these firms' problems out in chapter 11 might take awhile.

But even if the government saw fit to accelerate the Wall Street reorganizations to hedge the risk of a prolonged economic downturn, there is simply no reason for the government to overpay for assets from financially-troubled firms. Rather, the government should simply propose a plan that implements the going-concern liquidation and debt-for-equity reorganization features of chapter 11 on an accelerated basis in return for some reasonable financial contribution to the process. And you can bet that contribution doesn't need to be close to $700 billion.

Luigi Zingales, the Robert C. Mc Cormack Professor of Entrepreneurship and Finance at the University of Chicago, has written the most cogent piece I've seen to date on why the bailout is a bad idea. Even though it was wrong for the government to contribute to the massive amounts of wealth destruction that resulted from the demonization of Enron, the government was right not to bail out Enron. The circumstances are different now, so perhaps a different approach is more prudent than simply allowing all of these Wall Street companies to be sorted out in chapter 11.

But throwing $700 billion at investors and creditors who should be sharing the losses of their risk-taking is not even close to the best way of doing it.

Update: I couldn't help but laugh out loud this morning as Warren Buffett and the promoters of the Treasury bailout plan point to Buffett's sweet $5 billion investment in Goldman Sachs as an endorsement of the plan.

I prefer to look at what Buffett is doing rather than what he is saying.

What he is not doing is what Paulson and Bernanke want the U.S. Treasury to do -- buy investment banks' toxic assets. Rather, Buffett is buying preferred shares in Goldman with a big yield and warrants to buy Goldman stock at $115 (its trading at over $130) so that he can recover the profit his investment helps foster while Goldman transitions from an investment bank to a bank holding company over the next couple of years.

Meanwhile, Paulson and Bernanke keep promoting their plan to throw $700 billion at whatever trashy assets that Wall Street serves up to them.

It does not engender much confidence that Buffett can cut a far better deal with Wall Street's best-run investment bank than Paulson and Bernanke propose to cut with the worst-run ones.

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September 18, 2008

Absolutely AIGesque

Do you recall what we were thinking about three and a half years ago?

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September 16, 2008

That other hurricane

So, while the Houston area was enduring a hurricane, the financial markets were enduring one, too.

As with Enron and Bear Stearns, the demise of Lehman Brothers reinforces the inherently fragile nature of a trust-based business (related posts here). 

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 after Enron's collapse did not prevent Bear Stearns or 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. Better investor understanding of the wisdom of hedging that risk would help, too.

But as Warren Meyer eloquently wonders, what must Jeff Skilling be thinking about all this? Is Skilling's inhumane sentence -- as well as the barbaric handling of the criminal case against him and other Enron executives -- the sacrifice that American society needs to quench its blood thirst to do the same to the leaders of trust-based businesses that suffer the same fate as Enron? I hope not, but  .   .   .

The truth is that Enron -- as with Bear and Lehman Brothers -- was simply a highly-leveraged, trust-based business with a relatively low credit rating and a booming trading operation that got caught in a liquidity crunch when the markets became spooked by revelations about Andrew Fastow embezzling millions in the volatile months after September 11, 2001.

Fastow's embezzlement is a crime, but Enron's demise is not, nor should it be. Beyond the shattered lives and families, the real tragedy here is that an angry  mob convicted Skilling, trumping the rule of law and the dispassionate administration of justice along the way. None of us would be able to survive "in the winds that blow" from the exercise of the government's overwhelming prosecutorial power in response to the demands of the mob.

I continue to hope that Skilling's unjust conviction and sentence are reversed on appeal. Not only for his benefit, but for ours.

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September 11, 2008

Hank's Thank-You Note

Mr. Juggles over at Long or Short Capital passes along this fictional thank-you note from Treasury Secretary Hank Paulson to American taxpayers after this week's seemingly inevitable federal bailout of Freddie Mac and Fannie Mae (prior posts here):

Dear US Taxpayer,

I would like to congratulate you on your recent purchase. I am glad I was able to convince you that now is the ideal time to offer an uncapped backstop on a $5.2 trillion book of mortgages. We here at the Treasury Dept (along with our sisters over at the Fed), appreciate your repeat business. I am confident that this acquisition will be a profitable one; perhaps even more profitable than your recent purchase of JPMorgan’s Bear Stearns’ liabilities!

Please know that we are actively seeking more deals on which we can work together. I am confident we will find more interesting opportunities before the end of the year.

Yours Truly,
Hank Paulson

Herbert Spencer got it right long ago (H/T Bryan Caplan):

"The ultimate effect of shielding men from the effects of folly, is to fill the world with fools."

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August 27, 2008

The genesis of a mortgage fraud hotspot

Dealbreaker's essential Opening Bell yesterday included the following note about the connection between the state of Florida and mortgage fraud:

Florida tops 1Q mortgage fraud list (AP)

This is not surprising... Florida is already a key location of the housing bubble. What's more, Florida tops every fraud list. Hello, Boca Raton? Clearwater? These cities are to fraud what Hungary is to Paprika. It's an industry. Plus, doesn't Florida have really lax mortgage/bankruptcy laws as it is?

However, what's most interesting about Florida is how relatively well the state has turned out given its checkered history. In his fine Throes of Democracy: The American Civil War Era 1829-1877 (HarperCollins 2008) (earlier blog post here), Walter A. McDougall provides the following colorful overview of Florida's evolution from the epitome of a backwater port:

From the day of the of the pirates to our day of offshore bank accounts, hedonistic resorts, and drug smuggling, Americans have found in the Caribbean an escape from their own laws and morals. The sand spit that Juan Ponce de Leon baptized La Florida was no exception.

In 1595, the Spaniards garrisoned Saint Augustine, the oldest European settlement on what became U.S. soil; and over a century Franciscans founded thirty-two missions to proselytize the Indians. But the province, which was 300 miles wide at the Panhandle and 400 miles long on the Atlantic coast, remained a derelict.

The whole Spanish navy could not have policed its 8,246 miles of tidal coastline, nor could the army police its 54,000 square miles of jungle and swamp. Nor could either defend the Indians from European infectious diseases or from the renegade Creeks they called cimarrones (whence “Seminoles”).

By the nineteenth century, the Native American Floridians were dead, the European population was measured in hundreds, and the whole peninsula from the Apalachicola River to Key West served as a refuge for Tampa Bay buccaneers, mutineers, deserters, fugitive slaves, Seminoles, and plunderers of shipwrecks (a frequent occurrence, especially during the hurricane season). 

John Quincy Adams cited the anarchy as justification for the treaty of 1819 ceding Florida to the United States. But he was pretentious to think Americanization would ensure law and order. The mostly poor, mostly Scots-Irish “crackers” who spilled into the Panhandle had no patience for government. Hot blood, hot sunshine, laws so variable that even judges could not parse them, no jails, no constables, and plenty of places to hide encouraged “ingenious rascality.” Florida was “a rogue’s paradise.” [ .  .   .]

.   .   . [V]irtue was in short supply, not only among the murderers, gamblers, slavers, squatters, and drunks who poured over the border from Georgia, but among the erstwhile elite. One feud over banking provoked two duels, a murder and a lynching that left all parties dead. In 1827, Ralph Waldo Emerson found Tallahassee “a grotesque place . . . settled by public officers, land speculators, and desperadoes.”  .   .   .  [. . .]

The Jacksonian hatred of banks likewise prevailed. So stringent were the state’s restrictions that no state banks were chartered until the legislature itself chartered one in 1855. Education? The same story. In 1851, the state founded “seminaries” to train teachers at Ocala (parent of the University of Florida) and Tallahassee (the future Florida State University), but as late as 1860 the state counted just ninety-seven schools with 8,494 pupils.

The government showed vigor only in the enforcement of slave codes and the repression of free Negroes. As the state’s population rose from 87,445 in 1850 to 140,424 by 1860, the percentage of slaves remained above 40 percent. Disciplining that underclass was everyone’s business. Policing white people’s behavior was pretty much left up to the women and the Baptist and Methodist clergy. [.  .  .]

.    .    . Today [Florida] is home to Disney World, the space program, South Beach and golf and retirement complexes. But the original Florida will never die out so long as "darkies" gather in jook joints to dance the jubilee (jitterbug), bumper stickers proclaim "Redneck and Proud of it," policeman cruise with alcoholic "roaders" in hand, and transplanted Yankees are taught that "blacks is blacks, but there ain't nothin' sorrier than po' white trash."

Mortgage fraud doesn't sound all that out of place there, now does it? ;^)

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August 20, 2008

Martin Wolf on Capitalism

The new Creative Capitalism blog created by Bill Gates, Michael Kinsley and Conor Clarke is quickly making an interesting corner of the blogosphere. Today, Martin Wolf, the associate editor and chief economics commentator at the Financial Times, pens this remarkable blog post about what a company is, and what it is not, under different political systems. In so doing, Wolf provides a an engaging overview of the underlying forces that drive market economies. Read the entire post, but here here is a taste:

First, one has to distinguish the goal of the firm from its role. The role of companies is to provide valuable goods and services – that is to say, outputs worth more than their inputs. The great insight of market economics is that they will do this job best if they are subject to competition. Profit-maximization (or shareholder value maximization, its more sophisticated modern equivalent) is NOT the role of the firm. It is its goal. The goal of profit-maximization drives the firm to fulfill its role.

Second, by creating a competitive market for corporate control, we more or less force companies to maximize shareholder value, or at least behave in ways that the market believes will lead them to do so.   .    .

Third, a company is viewed in the Anglo-American world as a bundle of contracts. But companies are also social organisms created by a highly gregarious mammalian species with a unique capacity for large-scale co-operation over time and space. Companies have cultures and histories. For many of those most closely associated with them, they also have (and offer) a certain meaning. Committed workers in successful companies do not work in order to maximize shareholder value or even to earn the largest possible living. Indeed, it is impossible to direct most companies solely by the goal of profit-maximization. (Goldman Sachs may be an exception.)  They have to be aimed at the intermediate goal of producing and developing goods and services that people want to buy and are worth more in the market than they cost to produce.

Fourth, the idea that a company is an entity that can be freely bought and sold is culturally specific. It is the view, above all, of Anglo-Americans. It is not shared in most of the rest of the world.  .   .

Fifth, in this perspective, shareholders are not genuine owners. They contribute nothing of value to the competitive strengths of the firm, enjoy the benefits of limited liability and are well able to diversify the risks they run. They are merely an (ever-shifting) group of people with a claim to the residual incomes. Those with the biggest (undiversifiable) investment in the firm -- and thus the greatest exposure to firm-specific risks -- are not shareholders, but core workers. The interests of the latter are, therefore, paramount.

And as if the foregoing wasn't enough, Wolf follows that one up with this post on the issues involved in a company embracing social responsibility as a part of its role:

This is a point of considerable and, indeed, general importance. We live in a world of two fundamentally conflicting tendencies: between ever greater competition, as markets are liberalised and opened to the world, and greater demands on companies to bear social burdens of many kinds. But the latter is incompatible with the former. Extractive industries are in a relatively good position to meet such burdens, because they enjoy rent. In general, however, companies will be increasingly unable to bear them except to the extent that social obligations help them, rather than are costly to them.

That has an important consequence – positive and negative. The positive consequence is that many social goals can only be met through political action. That is also where they ought to be met. The negative consequences are two: first, where political systems are weak or defective, social goals will not be met; second, where companies feel forced by popular pressure to accept costly burdens – to pay higher than market wages, for example – they will feel obliged to lobby to spread those burdens onto all their competitors. The result could, at worst, be less efficiency and less economic growth than otherwise. In that case, therefore, social responsibility will become a machine for spreading anti-social outcomes. That is an end nobody should desire.

If you are involved or simply interested in business, my sense is that you should bookmark Creative Capitalism and check in often.

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August 14, 2008

Cowboy business

The Texans are the toast of their local cheerleading team, but the unquestioned NFL team of Texas remains the Dallas Cowboys. This Glenn Hunter/D Magazine interview of Cowboys owner Jerry Jones confirms that the Cowboys business model is performing very, very well:

With the Cowboys, you’re said to lead the league in corporate sponsorships. Can you give me an idea how much those relationships are worth each year?

We’ve got significant, long-term relationships with Dr Pepper, Miller Lite, Pepsi, Bank of America. If you would aggregate those key, basic long-term sponsorships, that would exceed $50 million annually. We have smaller relationships through our broadcasting, radio and television.

And for merchandising, would $50 million be a good number?

The wholesale-merchandising area is a very, very proprietary number that has a lot involved with it. Let’s see, how to say this? Our wholesaling and retailing combined, as far as financial viability is concerned, is on par with what we do with sponsorships. They are equal in their contribution to the Cowboys.

For the team as a whole, what are you looking at for revenue this year? A few years ago, the figure was north of $200 million; are you going up every year?

Yes, we are. I think it’s fair to say that we will be north of $300 million.

And yes, Jones really is sorry for the way he handled the firing of longtime Cowboys coach, the late Tom Landry:

You really turned around the Cowboys franchise in the early 1990s, and to do it you had to shake up the status quo, including firing the longtime coach, Tom Landry. To this day we hear complaints from longtime Dallasites about that. If you could do things over, would you have handled that differently?

Yes. I understand the criticism; I actually understood it then. I didn’t have a sense of how significant the emotional attachment was to Coach Landry, and to some degree [Cowboys President and General Manager] Tex Schramm, but especially to Landry and the franchise. He had actually transcended the franchise. I actually had very prominent consulting people—not one but two firms, Hill & Knowlton, out of Washington D.C., and one firm from Dallas—that were advising me all during this time. And they advised me in many ways to do it the way I did it. Bum Bright—the individual I bought the team from—offered, to his credit, to make all these changes and to sell the Cowboys to me with no one here, a clean slate. But I was advised, and I concurred with it, that everybody knew the reason the changes were coming was because of me, so I should be a man and directly do it myself, as far as Coach Landry’s and Tex Schramm’s situations—in other words, do it face to face.

Having said that, it’s not something I would do that way again. I would have been more sensitive. I don’t know if I would have gone so far as having Coach Landry coach one more year, then having a transition period of a year. Or work longer with Tex; come in and let them kind of mentor you, show you the ropes, talk about their fundamental vision for the Cowboys. In hindsight, that’s what people say I should have done. But again, unfortunately, I’ve always tried to get there quicker and consequently, as I said earlier, taken more risk by getting on with things.

Finally, just what does Jones think about this whole QB Tony Romo-Jessica Simpson thing?:

Speaking of the quarterback position, does Tony Romo’s high-profile relationship with the entertainer Jessica Simpson bother you, like it does some Cowboys fans?

Tony’s relationship with Jessica Simpson doesn’t bother me at all. It’s good for the franchise—adding sizzle and show business and interest—and it doesn’t affect Tony’s performance in any way.

Maybe so, but I'm not taking a chance on Romo in my Fantasy Football League's draft. ;^)

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August 10, 2008

Elegant Elk

Clear Thinkers favorite and longtime Houstonian Steve Elkington (PGA Tour page here) is now 45 years old and past his prime on the PGA Tour, where he has won a major (the 1995 PGA at Riviera), is a ten time winner (the most recent was in 1999 at Doral). Nevertheless, Elk continues to have one of most elegant golf swings on the Tour and remains quite competitive, reflected by his tie for eighth place through two rounds of this week's PGA Championship at Oakland Hills outside Detroit.

Mirroring his swing, Elk has also established himself as one of the most fashionable dressers on the Tour. During this first round of the PGA Championship, Elk was resplendent in a white shirt with pink dots and a hard collar, high-rise brown trousers with a windowpane check and long pleats, and green, white and red patent-leather Foot Joy shoes. Elk is continuing the tradition of fellow Houstonians Doug Sanders and the late Jimmy Demaret, both of whom were the fashion plates on the Tour during their respective eras.

As he winds down his PGA Tour career and prepares for the Champions Tour, Elk has established his own website -- elksworld.com -- where he is displaying and selling the shirts and caps he wears and designs. Elk also provides this slick deck that summarizes the marketing opportunities that businesses can derive by associating with Elk. Rather than selling advertising space on himself or his golf bag, Elk is using his artistic talent and entrepreneurial spirit to start an interesting business. Here's hoping that he is as successful in that endeavor as he has been during his PGA Tour career.

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August 9, 2008

Criminal justice?

The always-insightful Larry Ribstein points out that Jamie Olis would have been better off providing material support for Osama Bin Laden than working on the beneficial structured finance transaction that ultimately led to his criminal conviction.

The sad case of