The Metropolitan Transit Authority has been in the news recently mostly because of a good, old-fashioned document-shredding scandal and yet another spectacular crash.
But the more important issue facing Houstonians is that Metro is preparing to force large swaths of the community — including the key Uptown area near the Galleria — to incur the enormous cost of enduring construction of its inefficient and impractical rail lines.
Bill King has spent a considerable amount of his time over the past several years studying Metro and Houstonís transit problems. In this devastating post, King finds that Metro is close to barreling completely out of any semblance of fiscal control:
There could hardly be a more fitting image for the close of the current Metro administration than the recent photographs for a wrecked Metro buses in front of Metro’s headquarters after having been broad-sided by Metro’s Main Street light rail.
The last six years are likely to be remembered as the most ruinous time for public transportation in Houston’s history as Metro has pursued a single-minded obsession to build its version of an at-grade rail system regardless of the cost, both in financial terms and in the degradation of the bus system on which over 100,000 Houstonians rely daily.
Fortunately, Mayor Parker has ordered top-to-bottom review of the agency. Here is what that review is likely to find.
Decline in Ridership. Since 2004, Houston population has grown by over 10% from just over 2 million to 2.25 million. At the same time gas prices rose 47% from $1.81 per gallon to $2.67 per gallon. These two factors should have virtually guaranteed an increase in transit.
However, exactly the opposite has occurred as bus boardings dropped almost 24% from 88 million in 2004 to 67 million in 2009. Instead of increasing bus service by 50% as it promised the voters in the 2003 referendum, Metro has slashed bus routes and increased fares by over 50%.
Today Metro actually operates 225 fewer buses than it did in 2003. An outside performance audit in 2008 found that on-time performance fell by 29% from 2004 to 2008.
Financial Disaster. Since 2003, Metro’s sales tax revenues have increased by 43%, rising from $357 million to $512 million. At the same time, its fare revenue increased by 41% from $42 million to $60 million by charging an ever dwindling ridership more.
Yet, Metro is in the worst financial shape in recent history. At year end 2003 Metro’s current assets exceeded its current liabilities by $125 million. The budget just adopted by the Metro board projects that it will have current accounts deficit of $165 million by the end of this fiscal year, a stunning loss of nearly $300 million in just five years.
Over the same period, Metro’s debt has swelled by nearly 50% from $546 million to $816 million. [. . .] In the meantime, the cost of the [Metro’s Light Rail Transit lines] has risen from the $1.2 billion originally estimated to something well in excess of $3 billion.
Metro is seeking to borrow $2.6 billion to build the LRT, over four times what it promised the voters would be the limit in the 2003 referendum.
Originally, Metro assured voters that it could build the LRT without tapping the mobility payments that are so critical to the Houston and the other member cities. Metro’s projections now show that it can only afford the LRT if those payments are terminated in 2014. [. . .]
In 2003, after a spirited public debate, this community approved, by a narrow margin, a consensus plan to enhance public transportation with a multi-modal approach. Part of that bargain was a limited experiment with a light rail system. The voters specifically limited the resources that Metro could devote to the light rail for fear that the cost might undermine the solid, dependable bus service that existed at that time. Metro’s leadership has shredded that contract with the voters in favor of its own grandiose vision of transit that has little to do actually solving Houston’s mobility problems. In the meantime, traffic congestion continues to get worse and working families that rely on public transportation to get their jobs everyday find riding Metro a more difficult and more expensive proposition.
Read King’s entire post. Metro’s defenders typically rely on the 2003 referendum as the primary basis for their continued support of such wasteful spending. But the problem with such referendums is that they ask voters to approve large public ventures such as Metro in a vacuum while ignoring Peter Gordon’s three elegantly simple questions regarding economic choices:
1) At what cost?
2) Compared to what? and
3) How do you know?
For example, assume for a moment that voters were informed of the fact that the average urban freeway lane costs about $10 million per mile and that the average light rail line costs over $50 million per mile while carrying less than one-fifth as many people as the freeway lane. And these are only average figures.
Moreover, let’s assume that voters were informed that the expenditure of a billion or so of public money on expanding a lightly-used light rail system has real consequences, such as leaving inadequate funds to make improvements to Houston’s infrastructure that would dramatically decrease the risk of death and property damage from flooding. Or whether the billion or so being flushed down the light rail drain would be better used to fix various area traffic “hotspots” where accidents or bottlenecks occur with high frequency.
No one knows for sure, but my bet is that voting results would be dramatically different if the foregoing costs and alternatives were included as a part of the referendum.
Unfortunately, the relatively small groups that benefit from these urban boondoggles have a vested interest in keeping that threshold issue from ever being re-examined. The economic benefit of light rail is highly concentrated in only a few interest groups, such as political representatives of minority communities who tout the political accomplishment of shiny toy rail lines while ignoring their constituents need for more effective mass transit; environmental groups striving for political influence; construction-related firms that feed at the trough of Metro’s poor investment decisions; and private real estate developers who enrich themselves through the increase in their property values along the rail line.
As Professor Gordon wryly-noted in another post: “It adds up to a winning coalition.”
Unfortunately, once such coalitions are successful in establishing a governmental policy subsidizing such boondoggles, it is much more difficult to end the public subsidy of the boondoggle than to start it in the first place.
None of these above-stated reasons for mass transit appeal to the vast majority of the electorate, so this amalgamation of interest groups continues to disguise their true interests behind amorphous claims that the uneconomic rail lines reduce traffic congestion (they do not), curb air pollution (they do not), or improve the quality of life (at least debatable).
How do these interest groups get away with this? The costs of such systems are widely dispersed among the local population of an area such as Houston, so the many who stand to lose will lose only a little while the few who stand to gain will gain a lot.
As a result, these small interest groups recognize that it is usually not worth the relatively small cost per taxpayer for most citizens to spend any substantial amount of time or money lobbying or simply taking the time to vote against an uneconomic rail system.
Metro’s rail system is a bad virus that has infected Houston. The cost of treating this civic virus is growing larger each month. Without immediate re-examination of Metro’s light rail plan, the increasing costs of this plan risk turning this currently manageable problem into a major civic fiscal crisis that could negatively affect the Houston area’s growth and prosperity.
As Bill King exhibits, real leadership involves recognizing that risk and addressing it, not indulging it.
Mike over at the Crime and Federalism blog (a good blog, by the way) thinks my explanation yesterday of Lehman Brothers’ controversial repo 105 transactions is bullshit.
Well, I’m as full of bullshit as anyone, but my sense is that Mike’s analysis is flawed. That’s not to say that the folks involved in reporting Lehman’s earnings to the marketplace after those repo 105 transactions didn’t commit fraud. I don’t know enough about the facts to know one way or the other.
The main point of my post is that a whole bunch of of executives, accountants, auditors, counterparties and governmental officials were swirling around Lehman at the time of these repo 105 transactions. As a result, the responsibility for any fraud is better allocated among the responsible parties in the civil justice system than in the criminal justice system, where guilt is adjudicated with a sledgehammer when a scalpel is more appropriate.
But one of the interesting aspects about Mike’s post is that he is very sure that he understands that Lehman committed fraud. So, let’s take a look at his example of what he thinks happened with regard to Lehman and the repo 105 transactions (my observations are in italics below each of his statements):
I ask you to invest $100,000 in my new business. You ask me how much money I have in my business account. I only have $5,000, but do not tell you this.
Okay, as my prior post noted, I concede that Lehman may have misrepresented its true liquidity position through the repo 105 deals.
I can sell everything the business owns (including all of our inventory) to a pawn shop for $100,000.
If Mike can sell all the assets of the business to a pawn shop for $100,000, then the business owns much more than $100,000 in assets. Pawn shops – much like the financial institutions with whom Lehman was dealing – do not engage in repo 105 transactions unless they are darn sure that they can liquidate the assets that they purchase for more than they paid if the seller breaches his obligation to repurchase the assets.
The pawn shop will sell me everything back for $105,000 if I come up with the money within 48 hours. They won’t even take possession of the property if I pay them within 48 hours.
I do not know of any pawn shop – or financial institution for that matter – that would be willing to leave property that they purchased in the hands of a financially-troubled seller, even for just 48 hours. Moreover, my understanding of the repo 105 transactions is that Lehman was not obligated to repurchase the asset for the sale price plus 5%. My understanding is that the “105” in repo 105 relates to the fact that financial institutions require property at least worth 105% of the purchase price that the financial institution pays the seller for the asset. I’m sure that Lehman’s counterparties required a steep fee for engaging in the repo 105 sales, but not 5% of the purchase price.
I make the “sale” to the pawn shop. I show you a copy of my bank statement. You can see that I have $105,000 cash in my bank account. I’m, in other words, liquid 100 grand. You loan me $100,000.
Here is where Mike is confused. Prior to taking the $100,000 loan, his company’s balance sheet actually looks a bit worse because of his sale to the pawn shop. The company has sold assets worth more than $100,000 in order to increase its liquidity to $105,000. No rational investor would make a $100,000 unsecured loan to a company with assets of only $105,000 cash that the investor would not have been willing to make when the company had $5,000 cash and over a $100,000 in non-liquid assets. But let’s play along with Mike to get to his main point. After the loan, his company now has $205,000 in cash with a $100,000 liability.
I buy my stuff back for $105,000. I now have, thanks to you and some quick accounting fraud, $95,000.
No, that’s only part of it. The company now has repurchased its assets that are worth over $100,000, it has cash of $100,000 and a $100,000 liability. So, the company’s balance sheet is pretty much the same had the investor made his loan when the company only had $5,000 cash and over $100,000 of non-liquid assets. The only difference is that the investor feels deceived because he would not have made the loan under those circumstances.
So, maybe Mike’s investor in the example above has a good fraud case against the company (I’m not sure that’s the best way for the investor to recover his loan, but that’s another issue). But maybe not, too. And the situation that Lehman faced was far more complex than Mike’s hypothetical and involved a large number of well-intentioned people who were attempting to find any loophole available to save Lehman.
And that’s no bullshit.
The big news in the business world at the end of last week and over the weekend was the publication of the examiner’s report in the Lehman Brothers bankruptcy case.
The mainstream media jumped all over the report as a precursor to criminal indictments of former Lehman executives because of allegations in the report (that’s all they are at this point) that Lehman used repo 105 transactions at the end of several quarters to make its balance sheet look more attractive than it really was.
Fancy that, executives trying to stem a run on a trust-based business!
Despite the gathering MSM lynch mob, the truth is that the examiner’s report is shaky grounds, at best, for criminal indictments against former Lehman executives.
As folks who are experienced in bankruptcy realize — but those who aren’t don’t — an examiner’s report is hardly an objective analysis of a debtor’s affairs. Bankruptcy examiners are highly incentivized to recommend as many legal actions against the debtor’s insiders and counter-parties as possible.
The fruits of those legal actions inure to the benefit of the bankruptcy debtor’s creditors, which is really the only constituency in most bankruptcy cases that really can effectively challenge an examiner’s compensation. As a result, feather nesting is not an unusual tactic of bankruptcy examiners.
Moreover, examiner’s reports in bankruptcy cases are far from dispositive. I haven’t read the Lehman examiner’s report yet, but I’m skeptical of the MSM’s initial rave reviews. The Enron examiner’s report met with similar early favorable reaction, but it turned out to be chock full of plain factual errors and dubious conclusions based on those errors.
For example, the MSM’s reporting of the examiner’s conclusions regarding the timing of the repo 105 transactions doesn’t make sense to me.
As I understand those transactions, they improved Lehman’s balance sheet by increasing its liquidity position at the end of several quarters through converting non-liquid assets to cash. When Lehman repurchased the assets after the date of the financial statement, the balance sheet didn’t change much except for showing less liquidity because the repurchased asset – which went back on the balance sheet after the repurchase – was probably worth more than the liquidity used to repurchase it (I seriously doubt that the sharpies who were dealing with Lehman as it was going down in flames were consenting to using Lehman’s trash assets in the repo deals).
At any rate, Peter Henning and Larry Ribstein have both done a good job of analyzing the main problem facing the Lehman insiders from a criminal standpoint. It is different and potentially more troublesome than the honest services wire fraud theory that was the basis of most Enron-related prosecutions. That is, the Lehman executives are subject to the provisions in the Sarbanes-Oxley legislation enacted after Enron’s bankruptcy that impose criminal liability on executives who falsely certify the (i) accuracy of the financial statements and (ii) absence of deficiencies in internal controls regarding the preparation of the financial statements.
By the way, although Henning’s analysis is quite good, his analogy of the repo 105 transactions to the Nigerian Barge transaction in the Enron-related criminal prosecutions is a stretch.
The Nigerian Barge transaction was a relatively small deal in which Enron — about an $80 billion market cap company at the time — sold its interest in the Nigerian barges to Merrill Lynch to make a $12 million profit at the end of the particular quarter.
On the other hand, the examiner alleges that Lehman was using repo 105 transactions to raise $35 – $50 billion of liquidity at the end of several quarters. Big difference.
Also, flying beneath the radar (as usual) is current Treasury Secretary Timothy Geithner and former Treasury Secretary Hank Paulson’s role in all of this.
As closely as Geithner (as head of the New York Federal Reserve) and Paulson (as Treasury Secretary) were monitoring Lehman during much of this time, it strains credulity that Geithner and Paulson didn’t have at least some idea of what Lehman was doing to make its balance sheet as attractive as possible. Both Geithner and Paulson were intimately involved in attempting to broker a Bear Stearns-type bailout of Lehman.
So, if Geithner and Paulson knew what was going on, then how on earth is the federal government going to single out Richard Fuld and other former Lehman executives for criminal conduct?
Which brings us to the real lesson of all this — that is, the inherently fragile nature of a trust-based business and the misguided nature of the notion that more governmental regulation will somehow protect investors from the next bust of such a business.
Larry Ribstein has been insightfully pointing out for years that more regulation of those businesses will not prevent the next meltdown, just as the more stringent regulations added under Sarbanes-Oxley after Enron’s collapse did not prevent Lehman Brothers from failing.
More responsive forms of business ownership certainly are a hedge to the inherent risk of investment in a trust-based business. But also helpful would be better investor understanding of the wisdom of hedging that risk and the importance of short sellers in providing information on troubled companies to the marketplace.
And as for criminal prosecutions? Unless there is evidence beyond a reasonable doubt of a crime, far better to allow the civil justice system allocate responsibility for Lehman’s failure among the multitude of potentially responsible parties. Professor Ribstein nails this point in the final paragraph of his post:
The lesson here is that pursuing high-profile criminal prosecutions in Lehman after the problems with such prosecutions in these situations proved so manifest in Enron would prove that after a decade of hugely costly trials and a massive new law that was supposed to change everything, we still haven’t learned a thing about the unsuitability of criminal liability for these kinds of cases.
Finally, Lawrence Kudlow and John Carney have an excellent seven-minute discussion below of the failure of governmental regulation in regard to Lehman:
Conrad Blackís prison routine allows him time to think and write, which is a good thing in view of the enormous waste that results from his dubious imprisonment.
This week Lord Black takes aim at the myth of American exceptionalism promoted in this recent Richard Lowry and Ramesh Ponnurus essay (Walter McDougall has examined the origins of this myth in detail in the first two books of his fine three-part series on American history). In challenging the myth, Lord Black takes dead aim at a common topic on this blog ñ the overcriminalization of American life:
The wages of this [Cold War] victory have included the stale-dating of the authorsí claim that America ìis freer, more individualistic, more democratic, and more open and dynamic than any other nation on earth.î It is more dynamic because of its size, the torpor of Europe and Japan, and the shambles of Russia.
But Americans do not do themselves a favor by not recognizing the terrible erosion of their countryís education, justice, and political systems, the shortcomings of U.S. health care, the collapse of its financial industry, the flight of most of its manufacturing, and the steep and generally unlamented decline of its prestige.
. . . Rampaging and often lawless prosecutors win 95 percent of their cases (compared to 55 percent in Canada), by softening the pursuit of some in exchange for inculpatory perjury against others, in the plea-bargain system. The U.S. has six to fourteen times as many imprisoned people as other advanced prosperous democracies, and they languish in a corrupt carceral system that retains as many people as possible for as long as possible. There are an astounding 47 million Americans with a ìrecord,î and the country glories with unseemly glee in the joys of the death penalty. Due process and the other guarantees of individual rights of the Fifth, Sixth, and Eighth Amendments (such as the grand jury as any sort of assurance against capricious prosecution) scarcely exist in practice.
Most of the Congress is an infestation of paid-for legislators from rotten boroughs, representing the interests that finance their elections and exchanging earmarks with their colleagues like casbah hucksters. . . .
Lord Black can sure still turn a phrase — ìcasbah hucksters.î Ha!
So, the Houston Chronicleís Richard Justice is now writing in the San Francisco Chronicle that it was the fault of former Texans GM Charley Casserly and former head coach Dom Capers that former Texans QB David Carr did not develop into a decent NFL quarterback.
Of course, Justice extolled the virtues of that same Texansí management team immediately before their disastrous 2-14 season in Year Four of the franchise (2004):
The Texans have made good use of their honeymoon. They’ve drafted wisely and spent shrewdly on free agents. They’ve assembled a front office admired around the NFL. Their players seem to be quality people. [. . .]
The danger for them is that their greatest strength could become their greatest weakness. They’ve done so many things right and have built such a model operation that it’s impossible not to put expectations on a fast track. [. . .]
So far, it’s impossible not to be impressed with what the Texans have done. They are run as efficiently as any sports franchise I’ve ever been around.
Just before the start of training camp, Casserly gathered his employees and thanked them for all their hard work. Then he went down the list of different departments and explained some little thing each had done that made the team – and the organization – better.
That’s the kind of thing the people who run sports franchises almost never do, and it left every person who was mentioned proud to be associated with the Texans.[. . .]
Capers believes it’s vital to emphasize doing things right because "if you ever slip, you can never get it back."
So far, the Texans haven’t slipped in any significant way.
In fact, look at what Justice was saying about the Casserly-Capers-Carr regime even after it had put up a horrid 1-8 record through nine games of the 2004 season:
The Texans are respectable. They’re coming close. They’ve got four 2-7 teams left on their schedule. They almost won in Jacksonville, and they made a run at the Indianapolis Colts before losing 31-17 Sunday. [. . .]
The Texans are a better offensive team since [offensive coordinator Joe] Pendry took over [for the fired Chris Palmer]. David Carr looks like he’s on his way to becoming a first-rate quarterback. He’s quicker and more accurate in his throws, less likely to take a sack.
But then a couple of months later, after Carr and the Texans had cemented a perfectly awful 2-14 season, Justice had changed his tune to something similar to the one he sings now:
What we’ll never know is what would have happened if Carr had gotten with an organization that knew what it was doing. The Texans never protected him or coached him, never put enough talent around him. Shame on you, Charley Casserly. Shame on you, too, Bob McNair. Maybe you guys were wrong about what David Carr could have been, but you never gave him a chance to find out.
Uh, Richard. Five seasons is long enough. Yes, the Texansí offensive line wasnít all that good during that span. But Carr wasnít very good, either, and that didnít help the offensive lineís performance.
The bottom line is that David Carr was a poor NFL quarterback in Houston. Nothing that he has done with two other teams (with decent offensive lines) since his time here has changed that evaluation. The Texans made a big mistake in selecting him as the teamís first draft choice.
It really is that simple, Richard.
If you are interested in really first-rate analysis of the Texans, then check out local bloggers such as Stepanie Stradley, Lance Zerlein and Alan Burge. Their work beats the Chron sportswriters product hands down.
Iím routinely amazed at how oblivious some people are regarding their rude cell phone manners. So, the 5Across video conversation below on smartphone etiquette interested me.
However, what starts as a discussion about smartphone etiquette turns into a more engaging conversation on the various ways in which different people are processing information in their daily interactions with friends and co-workers.
Proper etiquette is pretty simple. But the way in which people of different social and work groups communicate with each other is not. Watch this fascinating discussion and discover why.
The Washington Postís Paul Farhi makes the interesting point in this American Journalism Review op-ed that the biggest scandal in regard to the Tiger Woods affair may be that the National Enquirer tabloid newspaper did a better job of following proper journalistic procedures in breaking the scandal than much of the mainstream media did in follow-up reporting on it:
[National Enquirer Editor] Barry Levine finds himself surprised, appalled and somewhat amused by the way much of the mainstream media handled the Woods scandal. The Enquirer’s original story, he notes, took months of reporting. It involved many hours of interviews, polygraph tests, stakeouts, document dives and travel. It was checked and re-checked.
But many members of the MSM, he notes, exercised no such care in reporting subsequent aspects of the story. "It would have taken us a couple of years to properly investigate each of these women’s claims as thoroughly as we did the first" woman’s, Levine says. "The stories were all over the place. There was just some outrageous coverage."
That’s right. The editor of the National Enquirer doesn’t think much of the way the "respectable" media covered Tiger Woods. Anyone paying close attention would concur that he has a point. It might be that the biggest scandal to come out of the Woods affair wasn’t the one about a golfer. It was the one about the news media.
Meanwhile, The New York Times ñ that paragon of the mainstream media ñ is currently taking it on the chin around the blogosphere because one of its leading business reporters essentially doesnít know what she is talking about in this article from over the weekend.
The blogosphere exposed the vacuous nature of how much of the mainstream media addressed complex issues. Now the tabloids are doing a better quality of reporting than many MSM publications on certain major stories. Will the mainstream media have any credibility or meaningful stature left when the reformation of how we process information is complete?