In the first of a three part series, this Washington Post article by Steve Fainaru examines the tactics that Major League Baseball Commissioner Bud Selig is using in auctioning the Montreal Expos off to the highest bidder among several investor groups and American cities. The article provides an excellent background on how Selig and Major League Baseball owners have used baseball’s anti-trust exemption and public financing of stadiums to increase the value immensely of MLB franchises, an approach that several expert commentators — particularly Professor Sauer over at the Sports Economist — have criticized on economic and political grounds.
The entire article is well worth reading, and includes nuggets of information such as the following about Jeffrey Loria, the former majority owner of the Expos who ended up owning the Florida Marlins after Selig engineered a swap of franchises when MLB bought the Expos several years ago. Loria’s handling of the Expos is the subject of litigation brought by Loria’s limited partners, who were pursuing that litigation even as New Yorker Loria’s new team was playing in last season’s World Series. You certainly did not hear about the following on the MLB broadcast as the World Series Trophy was being handed to Loria and the Marlins:

On their way out of Montreal, Loria and Samson stripped the franchise. With them went computers containing scouting reports on every Expos player, dozens of signed home run balls, even life-size cutouts of the team’s former superstar right fielder, Vladimir Guerrero. The Expos’ limited partners, meantime, became unwitting owners of 6 percent of the Marlins. In July 2002, they filed a racketeering suit in U.S. District Court in Miami. It charged Loria, Samson, Selig, DuPuy and the Office of the Commissioner of Baseball of illegally conspiring in what the suit called an “Expos Elimination Enterprise.”
The ongoing suit could complicate baseball’s plans for the Expos. The limited partners have 90 days to seek an injunction if baseball tries to move the team.
Last October, Loria’s Marlins miraculously found themselves in the World Series against the New York Yankees. “Can you imagine?” anguished one of the limited partners. “I’m sitting here. I’m an owner of the Florida Marlins. I’m rooting for the Yankees!”
And then, of course, the Marlins won.
This spring, nearly all the limited partners received World Series rings, even as they continued to sue Loria and Major League Baseball for racketeering in U.S. District Court.

Read the entire article.

As noted in this earlier post, the federal Air Transportation Stabilization Board announced last week that it had rejected Chicago-based United Airlines‘ application for a $1.6 billion federal loan guarantee, which was the foundation of United’s reorganization plan to emerge from its pending chapter 11 bankruptcy case.
Well, that government credit enhancement is just too attractive to pass up. Yesterday, only six days after the Board’s rejection of the prior proposal, United Airlines scaled back its request for federal loan guarantees to $1.1 billion from $1.6 billion and offered several other concessions in an effort to obtain the Board’s approval of the request.
Interestingly, Sen. Peter Fitzgerald (R., Ill.), a staunch opponent of the airline-aid program, yesterday asked the acting inspector general of the Treasury Department to investigate whether “any inappropriate political pressure or intimidation has been or is being applied to” the Treasury nominee on the loan board.
If the ATSB ultimately turns United Airlines down for a third time, the carrier will be forced to overhaul its business plan, cut its expenses further and hunt for a financing package in the open market, which, of course, is exactly what United Airlines should be required to do. Inasmuch as the company is reasonably flush with cash (that’s one of the advantages of operating in chapter 11 for a long time), United isn’t in any immediate danger of liquidation. However, United’s unrestricted cash, which was nearly $2 billion as of March 31, is projected to fall to under $800 million by year end. Airline analysts estimate that a comfortable level of unrestricted cash for an airline the size of United would be at least three times that amount. That’s why United is trying so hard to obtain this federal credit enhancement and also why the ATSB should not grant it.
Meanwhile, the Wall Street Journal’s Holman Jenkins, Jr. expands on Professor Ribstein’s position that good economic policy not only allows companies to thrive, but also to die:

What should be causing beads of sweat on the policymaking community’s collective brow is a structural impasse that makes it nearly impossible for failing airlines to die. Blame the bankruptcy courts, international route regulation, foolish antitrust prejudices or misguided investors. Blame Congress, which shouts “oligopoly” at any hint of an airline disappearing. Whatever the culprit, the country’s in a bad fix. It has too many network carriers trying to shrink their way to profitability when what we really need are fewer, bigger network airlines. Three such carriers would be plenty and two would probably be enough in a world where regional jets are coming on strong and where low-cost, entrepreneurial operators will show up on any route when money’s to be made by undercutting the incumbent.
Meanwhile, low-cost airlines now account for 29% of the business, up from single digits 15 years ago. They’re moving out onto the longer-hop routes (partly because fewer Americans rely on the plane for short trips since the security hassles tipped the balance in favor of driving). Frontier, Southwest and others are even developing what look suspiciously like hubs and spokes.

This NY Times article provides an excellent analysis of the trial of Mikhail B. Khodorkovsky, who, until his arrest eight months ago, was the chief executive of Russia’s Yukos Oil, which he had transformed into one of Russia’s biggest and most shrewdly operated companies. He also had amassed a personal fortune of at least $15 billion. Here is an earlier post on Yukos’ financial problems.
The trial of Mr. Khodorkovsky is attracting widespread interest in Russia and around the world business community:

“This should be Russia’s O. J. trial and should be the most public and most important bit of jurisprudence in modern Russian history,” said Bernard Sucher, a Moscow investment banker, referring to the attention on the trial of O. J. Simpson in the United States. “Most people want to look deeply at what happened here in the 1990’s, and this is a chance to come to terms with how the country ended up the way it did at the end of the Yeltsin years.”

The charges against Mr. Khodorkovsky are essentially that he orchestrated Yukos’ bilking of the Russian government to the tune of several billion dollars worth of taxes. Surprisingly, however, the market is not viewing the ominous tax debt as a death sentence for Yukos:

Yukos shares still soared on Thursday and Friday, suggesting that investors believe some sort of deal will be struck, possibly one in which the Russian government receives a stake in the company in exchange for settling the tax case.
Many of the early privatizations in the 1990’s involved banks ostensibly lending money to industrial companies in exchange for controlling stakes, a widely derided program known as loans for shares. If the Russian government continues to assert itself with Yukos, then loans for shares may morph into shares for taxes, giving the Russian government a new foothold in the economy.

Some observors of the trial view it as a contest between competing visions for how Russia’s economic power will be wielded in the post-Communist era:

Although the standoff between the men has been widely characterized as political, economic factors also forced Mr. Putin’s hand. Last year, Mr. Khodorkovsky tried to sell a large stake in Yukos to an American company, Exxon Mobil, without consulting the Kremlin – at a time when oil was becoming a pivotal geopolitical and economic resource prized by Mr. Putin. Mr. Khodorkovsky had also tried to shop an oil pipeline deal with China, a move at odds with Kremlin policy. A senior Yukos official conceded in an interview in Moscow late last year that the confrontation between the two potentates was grounded in sharply differing visions of how to steer Russia’s economic might.
For now, Mr. Putin’s vision is winning out. He has made an example of Mr. Khodorkovsky, cracking down on him with all the remorseless determination of an old Soviet hand and winning the support of average Russians dismayed by the country’s inequities.
And the models that Mr. Putin appears to favor are the managed economies of countries like Chile, China and Singapore, which blend market forces with a strong state role. Those economies were spared the free-market fluctuations that ravaged some developing nations beginning in the late 1990’s – like Russia and Argentina, which were privatized hastily, before viable regulatory and legal structures were put in place as checks on hit-and-run profiteers.
“Khodorkovsky’s personal fate in this is not the big picture,” said Stephen M. Kotkin, director of the Russian studies program at Princeton. “The big picture is Russia’s oil and gas holdings.”

Dire predictions about financial fallout from Mr. Khodorkovsky’s imprisonment last fall have not proved true so far. Foreign investors have not fled Russia in droves, as Mr. Khodorkovsky’s Western advocates initially envisaged, and the country’s economy is robust and thriving. The government is running a budget surplus, runaway inflation has been tamed, and the gross domestic product has risen at a brisk pace. From 1998, when the economy unraveled amid a financial collapse, to the end of 2003, Russian G.D.P. rose 38 percent, according to the World Bank – a stellar performance by any standard.

I particularly like Professor Kotkin‘s analogy for what’s going on in Russian business these days:

Mr. Kotkin likens current Kremlin politics to a rugby scrum, with market reformers, hard-line security advisers and members of Mr. Putin’s inner circle all wrestling for the upper hand in policy making. Mr. Kotkin suggests that if market reforms gain greater traction in Russia, then the rule of law, over time, will supersede the security apparatus – though he cautions that this is unlikely “in Putin’s lifetime.”

Russian business politics as a rugby scrum. Read the entire article.

This Houston Chronicle story reports that the Enron Task Force plans to ask a grand jury to indict in the next two weeks Ken Lay on charges relating to the last few months he was CEO of Enron before the the company filed its December 2001 bankruptcy case.
The Houston-based grand jury has already heard five days of testimony this month, all focused on Lay. The witnesses have included Lay’s former chief of staff Steven Kean and ex-Enron General Counsel Jim Derrick.
The Chronicle reports that that prosecutors are focusing on the following events in regard to Mr. Lay:

∑Lay’s receipt of three memos or e-mails warning of financial trouble and fraud at the company within weeks of Jeff Skilling’s abrupt August 2001 departure as CEO.
∑His public statements to investors and analysts.
∑Lay’s attempt to find an alternative to having to substantially write down the “goodwill” or excess price paid for assets.
∑His trades of company stock for millions of dollars in company cash in those last months.

Lay is likely to be charged with some type of fraud, similar to the charges against pending against former Enron CEO Jeffrey Skilling and former Enron chief accountant Richard Causey. They are charged with insider trading, securities fraud, wire fraud, conspiracy and lying on Enron financial statements.

The federal Air Transportation Stabilization Board announced on Thursday that it has rejected Chicago-based United Airlines‘ application for a $1.6 billion federal loan guarantee, which is the foundation of the second largest U.S. airline’s current reorganization plan to emerge from its pending chapter 11 bankruptcy case. The ATSB concluded that “the likelihood of United succeeding without a loan guarantee is sufficiently high so as to make a loan guarantee unnecessary.” The ATSB represents the Treasury Department, the Department of Transportation, and the Federal Reserve.
Nevertheless, the political pressure is already mounting to undermine the ATSB’s decision. House Speaker Dennis Hastert, R-Ill., said he favors reconsideration of United’s application. Moreover, United said in a statement that it will bring important modifications to its application and request reconsideration. Finally, United’s union members have been hammered with deep pay cuts during the reorganization, so Union leadership reacted angrily to the ATSB’s announcement.
In that connection, a reconsideration appears at least reasonably possible because the ATSB decision was a split vote. Treasury Undersecretary Brian Roseboro and Fed Governor Edward Gramlich voted no, while Transportation Undersecretary Jeff Shane voted to defer a decision to give the airline more time.
By all accounts, United’s new business plan was far superior to its previous ones. During its chapter 11 case, the company has cut its annual expenses by about $5 billion. However, the airline industry has continued to change rapidly during United’s chapter 11 case as a group of successful discount carriers now controls 25% of the domestic market. With their much higher costs, big airlines such as United have been losing billions of dollars a year by matching the discounters’ fares. Meanwhile, fuel prices have skyrocketed, making matters worse for the big boys.
The ATSB’s decision continues an admirable Bush Administration policy of being relunctant to bail out airlines. The ATSB was set up by Congress three years ago to handle the doling out $5 billion in direct grants to the industry and administering up to $10 billion in loan guarantees. At that time, the then-secretary of the Treasury and Federal Reserve Chairman Alan Greenspan criticized the idea of loan guarantees. The loan board received 16 applications for guarantees before the June 2002 deadline, and was tight-fisted in doling out aid. Eight applications were denied. The six that were issued amounted to about $1.5 billion.
The decision has no immediate effect on United’s operations in its pending chapter 11 case, which is a year and a half old now. Despite the political knashing of teeth over the ATSB’s decision, the decision is the correct one. Hopefully, the decision will stand and simply force the creditors with stakes in United’s survival to share the full economic risk of reorganizing United. As Professor Ribstein has articulated eloquently, risk of loss and threat of failure are powerful inducements to reorganize a big company the right way.

Holman Jenkins, Jr.’s Wall Street Journal ($) Business World column today is a nice tribute to the late President Reagan’s legacy toward the business community. Here is a tidbit:

The late president came into his political maturity as a traveling spokesman for General Electric, a company that each age seems to rediscover as an icon of American industry. Mr. Reagan traversed the land and heard GE executives complain about taxes and regulation, and, lo, somehow he understood that this was a bad thing, which was an achievement for his time.
Mr. Reagan’s GE years are shrouded in mystery, or at least shrouded in the discarded newspaper morgues of a hundred defunct small-town newspapers in places he visited and spoke on GE’s behalf. He received a treatment not unlike the rigorous apprenticeship afflicted on future CEOs of GE, shipped from place to place, meeting the company’s far-flung employees, seeing its various businesses up close. His GE minder, Ed Langley, was fond of saying that Mr. Reagan was “marinated in the middle class” in a way no politician could match, an experience that would have “turned Jane Fonda into Margaret Thatcher.”
Mr. Reagan drew a novel lesson from this experience: that corporations were full of hardworking, inventive people creating things of practical use to their fellow Americans. He failed to notice the befouling of any wetlands or the extinction of any owls. To many critics who even now are starting to pipe up, Mr. Reagan was an enemy of the poor — because to be supportive of business was, ipso facto, to be an enemy of the poor. He would have understood; he was once a business basher himself. In 1948, Mr. Reagan stumped right along with Harry Truman, giving speeches that blamed the excessive profits of greedy businessmen for inflation.
Here resides the single most overlooked achievement of Mr. Reagan’s legacy, what Bear Stearns economist David Malpass calls his “reminding us that the private sector is OK.”

Read the whole piece.

A KPMG tax shelter that the Internal Revenue Service last year declared abusive snared a group of prominent American companies, reflecting the popularity of efforts to reduce corporate taxes has become. Here are earlier posts on KPMG’s mounting problems relating to promotion of such tax shelters. The highly aggressive shelter that KPMG promoted was called the “contested liability acceleration strategy,” or CLAS, and it has been estimated that the promotion of the shelter generated $20 million in fees for the firm..
This Wall Street Journal ($) article reports that the IRS contends tht the KPMG promoted shelter generated at least $1.7 billion in tax savings for more than 25 companies. Delta Air Lines, Whirlpool Corp., Clear Channel Communications Inc., WorldCom Inc., Tenet Healthcare Corp. and the U.S. units of AstraZeneca PLC and Fresenius Medical Care AG all bought the shelter. Apparently, several other prominent companies signed agreements to buy the shelter, but it was unclear whether those companies actually implemented it.
A federal grand jury in Manhattan is currently investigating KPMG‘s past tax-shelter activities. At this point, it’s not known what penalties the IRS will seek from KPMG in connection with CLAS or other past shelter sales.

This NY Times article gives a good overview on the state of United Airlines, which continue to flounder in a chapter 11 case filed in December 2002. As the story relates, United’s emergence from chapter 11 is based upon the Air Transportation Stabilization Board‘s expected approval of United’s application for $1.6 billion in federal loan guarantees that will allow United to raise the capital necessary to fund its reorganization plan and post-bankruptcy operations.
Quare: Why is the federal government in the business of providing credit enhancements for an industry that, as Warren Buffett pointed out several years ago, if one tabulates all of the airline industry’s finances since the day the Wright Brothers in 1903, one would discover that, cumulatively, there has not been a single penny of profit? (Mr. Buffett has also suggested famously that, in hindsight, shooting down the Wright Brothers on that beach would have been a reasonable financial, if not moral, move).
I know what Professor Ribstein‘s answer would be. Update: I was right!

One of the most interesting CEO’s around these days is Brad Anderson of Best Buy (my teenage sons’ favorite store). In this NY Times article, Mr. Anderson, 55, tells his story of working his way up the ladder as Best Buy grew. It is a quintessentially American business story. The entire piece is well worth reading, and here are a few tidbits to give you a flavor for Mr. Anderson’s story:

I was a C-plus student in high school. My guidance counselor told me, “Some of us, son, are just not meant for college.”

I became a clerk in a stereo store called Sound of Music, a forerunner of Best Buy, in West St. Paul, where I bought my stereo in college. I loved music and was looking for a job where I could listen to music and get paid at the same time.
I didn’t know how to sell anything. You were paid on commission and I made $69 for two weeks’ worth of work. I wanted to quit, but then I figured out how to do it: do anything for the customer. The first stereo I ever sold I delivered personally, 70 miles away, and installed it myself. Then I actually started being good as a salesman, and somehow, after 31 years, I managed to work my way up to C.E.O.

We did some things right and a lot wrong. We reduced our operating expenses so Sound of Music could survive. I would literally drive the product to the stores when I went out to do the training.
But we did lots of stupid things, like when we went for a month without advertising. It was a good way to learn how valuable advertising was.

I’ve had a lot of mentors, especially my father, Marbury Anderson, and the founder of the company, Dick Schultz. I remember spending time with Dick when I was just starting out, and he was talking about the $50 million company he was building. By the time we built the $50 million company, he was on to building the $500 million company. That inspiration was so essential.

My sons used to have to drag me into Best Buy, but, over time, I have come to appreciate the store. Knowing that Brad Anderson is running Best Buy makes it even easier to enjoy.

After embarrassingly missing the point in its earlier article on the recent firing of Landry‘s CFO, the Chronicle finally makes the connection between that event and the firing of Landry’s auditor a month ago.
By the way, I do not buy Landry’s explanation that these two events were “coincidental.”