The real LinkedIn morality play

linkedin-logoSo, the NY Times Joe Nocera (as well as Henry Blodget) think that the investment bankers scammed LinkedIn’s owners in favor of the investment bankers other customers.

Grand conspiracy theories – as well as criminal prosecutions – certainly have been hatched with less.

But as the Epicurean Dealmaker lucidly explains (also here), morality plays and conspiracy theories are hard to piece together given the wide variety of forces that are in play when owners of a company tap the public markets with a piece of their company. Heck, LinkedIn’s shares are trading at a massive multiple to what they traded for recently in private in secondary markets.

The instinct of most politicians and much of the mainstream media is to embrace simple “villain and victim” morality plays when attempting to explain a particular outcome in which someone gained at the expense of someone else.

Take, for example, investment loss. The more nuanced story about the financial decisions that underlie a failed investment strategy doesn’t garner sufficient votes or sell enough newspapers to generate much interest from the demagogues or muckrakers. That’s why we periodically endure witch hunts — such as demonizing speculators – when it’s unquestionable that speculation in markets has a beneficial purpose.

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

 

Geithner as matinee idol

TimGeithnerAs regular readers know, I have long thought that Timothy Geithner is in over his head as Treasury Secretary.

So, it stands to reason that many people continue to listen carefully to what he says, this time at the opening of the new HBO film based on Andrew Ross Sorkin’s book about the most recent financial crisis, Too Big to Fail.

“You can’t prevent people from making mistakes,” observed Geithner philosophically. “Taking too much risk and making stupid mistakes may not be a crime.”

Yeah, right. Try to persuade Jeff Skilling of that.

The reality is that there isn’t much difference between the way in which Geithner and Skilling reacted to their respective crisis. Yet one remains in one of the most powerful positions in government, while the other wastes away in a prison cell.

There is simply no rational basis for the disparate treatment of these two men.

Warren Buffett, self-preservationist

warren_buffett2Professor Bainbridge surmises that Berkshire Hathaway’s Warren Buffett threw David Sokol under the bus in connection with the Berkshire audit committee report on Sokol’s front-running stock purchases, which may be the subject of criminal investigations at this point. Frankly, the Professor makes a good case.

However, no one should be surprised if that was Buffett’s purpose. As noted here, here and here, there is certainly precedent for Buffett offering up sacrificial lambs to protect himself and Berkshire. That precedent certainly had consequences for the ones who were fingered, too.

Meanwhile, Jeff Skilling remains living in a Colorado prison under the cloud of a 25-year prison sentence, partly because he was unwilling to emulate Buffett’s behavior.

Neither Warren Buffett nor David Sokol is a criminal. But neither is Jeff Skilling. What is criminal is a system that offers perverse incentives for risk-takers who generate jobs and wealth to finger others to protect themselves from the government’s arbitrary exercise of its prosecutorial power.

The Fifth Circuit punts on the Skilling case again

skilling 040711The Fifth Circuit Court of Appeals has not exactly distinguished itself in regard to the appeals emanating from Enron criminal matters.

First, there was the appellate court’s affirmation of the U.S. District Court’s ludicrous conviction of Arthur Andersen. That gem was subsequently overturned by a unanimous U.S. Supreme Court.

Then, a Fifth Circuit panel affirmed the District Court’s brutal conviction of former Enron CEO Jeff Skilling. That pearl of judicial wisdom was disassembled by a largely unified the Supreme Court last year.

As if on cue, a Fifth Circuit panel has predictably produced another clunker, this time affirming Skilling’s convictions on conspiracy and securities fraud counts because the erroneous reliance of the prosecution on Skilling’s honest services wire fraud amounted to harmless error.

In short, the Fifth Circuit rationalizes that the prosecution really didn’t rely all that much on all that honest services stuff in convicting Skilling, so his convictions on the other charges should stand.

Yeah, right. The prosecution didn’t rely on the honest services counts all that much? Poppycock. For example, remember the absurd amount of time that the prosecution spent during trial on Skilling’s alleged honest services violations in regard to Photofete?

What is most striking about the Fifth Circuit’s decision is its utter vacuity. For example, the decision contends that there was “overwhelming evidence” that Skilling committed securities fraud by engaging in fraudulent accounting in regard to several Enron units. But the decision fails to cite any of the supposedly “overwhelming evidence” and doesn’t even address the rather important point that the prosecution did not accuse Skilling of falsifying any of Enron’s accounting. In fact, the prosecution didn’t even put on any expert evidence that Enron’s accounting for the allegedly misleading disclosures was wrong, much less false. This tortured logic took this Fifth Circuit panel six months to generate?

Oh well, this matter is far from over. Not only is the case going back to the District Court for re-sentencing, but now Skilling finally gets his opportunity for the first time to seek a new trial on the egregious prosecutorial misconduct (see also here) that was uncovered after the conclusion of the first trial. And you can bet that the Fifth Circuit panel’s most recent rationalization will eventually be the subject of another appeal to the Supreme Court.

Meanwhile, a man who was a primary component in creating enormous wealth for investors and thousands of jobs for communities continues to sit in a Colorado prison.

Sure seems to me as if we could use more of those in the business community these days.

Update: Ellen Podgor has her typically cogent analysis of the Fifth Circuit decision here.
Fifth Circuit Skilling Decision 06-20885-CR1.wpd

It’s not rocket science, part II

NYC Bridge loanWith high levels of municipal debt reverberating around the country, Alex Pollack provides this timely post on the what happened when New York City couldn’t find any buyers for its municipal bonds back in 1975.

As Pollack explains, despite dire warnings of disaster from the financial pundits of the day, the Ford Administration declined to have the federal government bail-out New York City from its bond default. After NYC defaulted, disaster did not occur and the world financial system did not collapse.

Does that fear-mongering remind you of anything that occurred more recently?

Remember, this really is not rocket science.

Taking stock of golf

MickelsonThe Houston golf community is abuzz today with Phil Mickelson’s dominating performance over the weekend in shooting 16 under par over his final two rounds to win the Shell Houston Open by 3 strokes. Not a bad way to warm up for the Masters this week, eh?

Also, The Woodlands’ Stacey Lewis, with whom I have hit golf balls at the local driving ranges over the years, broke through in a big way yesterday by winning her first LPGA tournament and first major, the Kraft Nabisco Championship.

Meanwhile, other aspects of the golf business aren’t quite so rosy. This NY Sunday Times article surveys the carnage of Tiger Woods’ first three ventures into the golf course design business, each of which is either failed or undergoing restructuring. Tiger still has not finished a golf course that his group has designed.

Of course, such problems are not solely of Woods’ design business. This San Antonio Express-News article reports on the multiple, successive restructurings of the long-distressed Boot Ranch project near Fredricksburg. And with only 105 members — and still charging a $100,000 membership fee and $12,000 in annual dues to a non-existent supply of prospective members – the developer suggests that this is a viable business model? What are they drinking?

Those interested in the golf business will sit back and put these untidy matters aside while enjoying the annual spectacle of the Masters this week. But it’s not lost on those who care about the future of golf that the success of the Masters and the Augusta National Golf Club bear little relationship to the state of the golf business elsewhere.

Clinging to obsolescent business models in the face of changing market conditions is a prescription for failure.

The greatest invention of the industrial revolution

Hans Rosling argues below that it was the humble washing machine. But Stephen Bainbridge makes a compelling argument in favor of an even more underappreciated invention.

The Great Retirement Swap

retirement-for-dummies-largeThe concept of retirement is undergoing fundamental change. Does anyone really believe anymore that it’s possible for most folks to live comfortably over the final third of their lives while essentially generating no income?

That changing dynamic is behind such ventures as the Great Retirement Swap:

The way that we think about retirement in America is fundamentally flawed. The current retirement system assumes that people must diligently invest in the stock market over an extended period of 30 years or more in order to buy things in the future – like food, shelter, and clothing.

But what if people are free to share, barter and swap for these goods? To travel to wherever they want, provided someone has a spare room for them to use? To have access to any item they need, as long as they have an item of similar value to swap?  [.  .  .]

Well, what if we fundamentally change the way we think about retirement to take into account the new trend toward collaborative consumption? Call it The Great Retirement Swap. At a macro-level, Americans would be swapping a bleak version of retirement for a positive, hopeful one.

At a more tactical level, older Americans would be swapping for goods and services, rather than owning them. Wealth in retirement would become a relative issue – are you wealthier if you own a second home in Florida, or if you have unfettered access to apartments across Europe, at any time of the year? [.  .  .]

While all this sounds a bit "un-capitalistic," it’s actually the free market at work, on a grand scale. When you barter for goods, there is a market price established for those goods. And best of all, it doesn’t require 7% annual compounded returns in the stock market to succeed.

With millions of Baby Boomers set to start retiring within the next few years, retirement nest eggs shattered by the financial crisis, and even eternal optimists convinced that Social Security is no longer sustainable in the long-run, it’s time to start thinking of a ground-breaking, innovative – dare I say it – radical solution for helping Americans attain the type of retirement they always dreamed of in their golden years.

Regardless of the feasibility of the Great Retirement Swap, what are the chances that government will do a better job than markets in providing choices for retirees?