Most people underappreciate the difficulty of managing a business profitably. This video explains a big part of the problem well.
The challenge of managing a business profitably
1
Category Archives: Business – General
A lesson on using other people’s money
Well, maybe it’s not all so bad after all that the Harris County Sports Authority used junk debt to finance construction of Reliant Stadium. Check out what’s going on in St. Louis (H/T Craig Depken):
Eight years ago, as the St. Louis Cardinals aimed to build a new baseball stadium, team owners signed an agreement with the city worth millions of dollars a year in tax breaks.
In exchange, the team agreed to a series of annual perks for the region’s residents – 100,000 free tickets, 486,000 seats for under $12 and $100,000 in donations to recreation for disadvantaged youths.
The Cardinals also agreed to give the city a cut of profits made if any portion of the team was sold.
Then, last year, owners sold a sizeable chunk of the Cardinals – more than 13 percent. Now, a group of anti-public-stadium advocates is alleging that the team owes the city hundreds of thousands of dollars.
And, despite another multimillion-dollar budget gap anticipated for the coming year, the city isn’t checking into it. City officials acknowledge that they have never really kept tabs on the agreement.
. . . Several city officials, including Barb Geisman, the former deputy mayor for development, said there was no reason to double-check. They trust the Cardinals.
Which reminds me of what the late Milton Friedman used to say about the dynamics of using other people’s money:
“There are four ways in which you can spend money.”
“You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.”
“Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.”
“Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!”
“Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get.”
“And that’s government . . .”
The End of the Backdating Lottery?
Larry Ribstein from the blogosphere and Holman Jenkins from the financial media have been leaders over the past several years in exposing the Department of Justice’s disingenuous campaign to criminalize the corporate compensation technique commonly known as backdating stock options.
Now, with Judge Wright’s sentencing decision last week in the criminal case of former KB Home executive Bruce E. Karatz, Ribstein and Jenkins’ insight has finally been judicially adopted. The real crime in the backdating scandal was that prosecutors and the mainstream media once again jumped to create a witch hunt targeting wealthy businesspeople even though it was far from clear that backdating was actionable from a civil standpoint, much less a criminal one.
So, what drives this damaging syndrome? We use myths – such as that wealthy businesspeople must have cheated to make so much money — to distract us from our innate vulnerability. We rationalize that a wealthy and powerful person did bad things that we would never do if placed in the same position even though we really have no idea how we would react to the incentives that the object of scorn faced. As a result, we ridicule the rich and powerful as we attempt to purge collectively that which is too shameful for us to confront individually.
Beyond the shattered careers, lives and families that lay in the wake of this syndrome, it is incredibly damaging to our society in other important respects.
For example, business prosecutions over merely questionable business judgment obscure the true nature of risk and fuel the myth that investment loss results primarily from criminal misconduct rather than market forces. In reality, business risk is what leads to valuable innovation and wealth creation. Throwing creative and productive business executives such as Michael Milken and Jeff Skilling in prison does nothing to educate investors about the true nature of risk and the importance of such investment strategies as diversification.
Moreover, ignorance about business risk has led in part to the criminalization of business lottery that is arguably best reflected in the selective prosecutions of the backdating cases. That lottery simply breeds even more cynicism for the rule of law.
So, isn’t it about time that we put such an obviously damaging syndrome to rest for good?
What is the greater corruption?
Or the FBI using its resources to investigate this?
The FBI shouldn’t be involved in such matters at all. But if the G-Men insist on investigating, they should be investigating why some institutions of higher education are getting away with making great wealth from their football programs while colluding to restrict the compensation paid to the predominantly black professional athletes who take enormous risk to life and limb to generate that wealth.
If Cam Newton received money to play for Auburn, I’m glad he got it and that he didn’t take the discounted payment from Mississippi State. He deserves every dime that he was paid.
Guilty Until Proven Innocent
R. Allen Stanford is not a popular person to defend.
But one does not have to defend what Stanford allegedly did in building his financial empire to decry the treatment that he has received from the federal government since his indictment in early 2009.
Earlier posts on this blog pointed out the federal government’s unusually brutal treatment of Stanford pending his trial on business fraud charges that will probably take place sometime next year. The U.S. Department of “Justice” routinely responded to Stanford’s mistreatment by contending that nothing unusual had occurred with regard to Stanford and that he was being treated the same as any other defendant who was being held in prison pending trial.
Well, that contention appears to be bullshit, to put it mildly.
The Daily Mail Online finally obtained photos of Stanford after he had been attacked in prison (H/T Henry Blodget) and they depict injuries that are even worse than those described in Stanford’s court pleadings.
For years, we allowed an out-of-control federal task force – egged on by a vacuous mainstream media – to ride roughshod over local citizens’ Constitutional rights.
Now, before our eyes, the presumption of innocence has been eviscerated in the Stanford case with nary a peep of protest other than from Stanford’s attorneys and a few bloggers.
“When the last law was down, and the Devil turned ’round on you, where would you hide, the laws all being flat?”
“[D]o you really thing you could stand upright in the winds that would blow then?”
Will justice be done in Jeff Skilling’s case?
Oral argument before a Fifth Circuit Court of Appeals panel in Houston occurs today on the U.S. Supreme Court’s reversal and remand of former Enron CEO Jeff Skilling’s appeal of his criminal conviction.
Although the Supreme Court did not overturn all counts of Skilling’s conviction, it remanded the remaining counts to the Fifth Circuit to determine whether any of them should stand given the Supreme Court’s reversal of the other counts based on the invalid “honest services” wire fraud charges.
In essence, Skilling is arguing on remand that the government relied on the amorphous nature of that invalid theory of criminality in obtaining a conviction against him on numerous different charges. Having relied on that invalid theory of criminality, Skilling contends that the government cannot now prove that the jury didn’t rely on it in convicting Skilling on the other charges, too. Although results rarely occur as they should in misdirected criminal prosecutions, Skilling really should win his release and a re-trial.
Meanwhile, rather than address the merits of Skilling’s important case, the Wall Street Journal – which already has a dubious record of coverage in Enron-related criminal prosecutions – serves up the following characterization of the Enron-related prosecutions in this recent article on another miscarriage of justice related to the demise of Enron:
The U.S. government’s Enron Task Force criminally charged about 30 individuals, including Mr. Brown, but said there were more than 100 other unindicted co-conspirators. The task force got guilty pleas from more than a dozen people and won a 2006 fraud conviction against former Enron President Jeffrey Skilling.
Some of the group’s courtroom victories have been upended on appeal. Mr. Skilling’s conviction and 24-year sentence are under appeals-court review following a Supreme Court decision invalidating part of his case.
“Some of the [Enron Task Force’s] courtroom victories have been upended on appeal“? In reality, not any of the criminal convictions that the Enron Task Force obtained after a trial have been upheld on appeal. Not one.
Seems like something that the nation’s leading business newspaper would get right, don’t you think?
An Entertaining Form of Corruption
As I’ve noted many times over the years, big-time college football is an entertaining form of corruption, but corruption nonetheless.
Several recent articles reminded me of this corruption and the almost pathological obsession of the mainstream media to avoid addressing it, particularly during the highly entertaining football season.
First, there was this Joe Draper/NY Times article on how the highly valuable Big Ten Network is changing the financial landscape of college sports.
Not once is it mentioned in the article that the people who are actually creating most of that value – i.e., the young athletes – are forced to compete under a system of highly-restricted compensation while some bastions of higher learning profit from the value that they create.
In their honest moments, how do the academics rationalize that sort of exploitation, particularly when much of it involves undereducated, young black men?
Meanwhile, this breathless Pete Thamel/NY Times article reports on how the regulator of this corruption – the NCAA – is really cracking down now on coaches who have the audacity of attempting to provide to the athletes a pittance of the compensation that the bastions of higher education are preventing them from receiving. Not once in the article is it mentioned that the system is exploiting these athletes for the benefit of the NCAA and its member institutions.
Finally, this William Winslade-Daniel Goldberg/Houston Chronicle op-ed thoughtfully points out the ethical issues that arise as a result of exposing young athletes to serious and often undisclosed risk of injury and loss of potential future compensation.
So, what is it about football that generates such cognitive dissonance when young professional athletes in other sports such as golf, tennis, and baseball are not subjected to such arbitrary restrictions in compensation?
Are we concerned that the sacred traditions of college football might change if the current system is altered to compensate the young athletes fairly for the risks that they take and the wealth they create? Are those traditions truly worth the perpetuation of such a parasitic system?
There is nothing inherently wrong with universities being involved in the promotion of professional minor league football if university leaders conclude that that such an investment is good for the promotion of the school and the academic environment.
But do so honestly. Allow the players who create wealth for the university to be paid directly. If they so desire, universities could establish farm team agreements with NFL teams and cut out the hypocritical incentives that are built into the current system.
Not only would such a system be fairer for the players who take substantial risk of injury in creating wealth for the universities, it would obviate the compromising of academic integrity that universities commonly endure under the current system.
So, why are the leaders of our institutions of higher learning not leading the way toward a fairer system?
Perhaps the problem is that they are really not leaders at all?
The Magnificent Corporation
Wise words from Professor Bainbridge:
Legal education pervasively sends law students the message that corporate lawyering is a less moral and socially desirable career path than so-called “public interest” lawyering. The corporate world is viewed as essentially corrupting and alienating, while true self-actualization is possible only in a Legal Aid office.
Our students get these messages not only in law school, of course, but also in the media. Films like “A Civil Action” or “Erin Brockovich” illustrate the general ill repute in which corporations-and corporate lawyers-are held, at least here in Hollywood.
In my teaching, I have chosen to unabashedly embrace a competing view. I tell my students about Nicholas Murray Butler, president of Columbia University and winner of the Nobel Peace Prize, who wrote that: “The limited liability corporation is the greatest single discovery of modern times. Even steam and electricity are less important than the limited liability company.”
I tell them about journalists John Micklethwait and Adrian Wooldridge, whose magnificent history, The Company, contends that the corporation is “the basis of the prosperity of the West and the best hope for the future of the rest of the world.” [. . .]
The corporation also has proven to be a powerful engine for focusing the efforts of individuals to maintain economic liberty. Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and, of particular relevance to the present argument, a substantial sphere of economic liberty therein serve the public interest. Put another way, private property and freedom of contract were “indispensable if private business corporations were to come into existence.” In turn, by providing centers of power separate from government, corporations give “liberty economic substance over and against the state.” [. . .]
And so I ask my students: What explains the relatively rapid development in the mid-19th century of a recognizably modern corporation and, in turn, that entity’s emergence as the dominant form of economic organization?
The answer has to do with new technologies – especially the railroad – requiring vast amounts of capital, the advantages such large firms derived from economies of scale, the emergence of limited liability that made it practicable to raise large sums from numerous passive investors, and the rise of professional management.
For the most part, these advantages remain true today. The corporation remains the engine of economic growth, both at the level of giants like Microsoft and garage-based start-ups.
The rise of the corporate form thus has “improved the living standards of millions of ordinary people, putting the luxuries of the rich within the reach of the man in the street.” The rising prosperity made possible by the tremendous new wealth created by industrial corporations was a major factor in destroying arbitrary class distinctions, enhancing personal and social mobility. Many of the wealthiest businessman of the latter half of the 19th Century and the 20th Century began their careers as laborers rather than as scions of coupon-clipping plutocrats.
And so I put it to my students this way: You want to help make society a better place? You want to eliminate poverty? Become a corporate lawyer. Help businesses grow, so that they can create jobs and provide goods and services that make people’s lives better.
So, why are we doing this to those who are attempting to facilitate the benefits of this marvelous creation?
The creative nature of football innovation
Inasmuch as Texas has always been a hotbed of innovation in football, this guest Freakonomics post by law professors Kal Raustiala and Chris Sprigman caught my eye:
The theory behind copyright is simple – if we allow anyone to copy a good new idea, then no one will come up with the next one. The theory makes perfect sense – in theory. [. . .]
There has been a lot of innovation in football, in both offensive and defensive systems. But there has been virtually no attempt to copyright or patent these innovations. There are some serious doctrinal hurdles, but it’s not impossible to imagine the law providing protection. [. . .]
So why do football coaches continue to innovate, even when they know that their rivals will study their innovations, take them and use them? That is, why do football coaches engage in intellectual production without intellectual property?
The authors go on to characterize football as one of the industries in which innovation is best facilitated by intense competition rather than by copyright protection of new ideas. But what is interesting is that, even with the innovations of the pass-happy offenses of the past decade or so, the top teams at the highest levels of college and professional football continue to be the ones that balance an effective passing offense with a solid rushing attack that can wean time off the clock to protect a lead.
Sometimes the more things change in football, the more they remain the same.
Your Department of Justice at work
A couple of months ago, this post reviewed the living hell that former Merrill Lynch banker James Brown had been living for the past seven years as he he attempted to salvage his reputation and career after being targeted in the now-thoroughly discredited Nigerian Barge prosecution that arose from the demise of Enron.
As that earlier post noted, after the Fifth Circuit reversed Brown’s conviction on honest services wire fraud, the DOJ had inexplicably teed up yet another trial of Brown, which was scheduled to begin next week.
Meanwhile, Brown was seeking a dismissal of the case and of his conviction on additional charges of perjury and obstruction of justice. Those latter charges arose from Brown protesting his innocence to the grand jury that indicted Brown and the other Nigerian Barge defendants on the fallacious honest services wire fraud charges.
Sort of wrong to be convicted of perjury and obstruction for saying that you’re innocent of something that is not a crime, don’t you think?
At any rate, earlier in the week, the prosecution in Brown’s case out of the blue requested a continuance of the September 20 trial setting. The government’s dubious grounds for the continuance were that Brown might win an appeal on his perjury and obstruction charges, so the District Court should wait on the outcome of that appeal so that all of the charges could be tried at one time.
After seven years, that’s a flimsy reason for a continuance, but at least it’s colorable.
However, as Brown’s opposition to the government’s motion reveals, the reason was also false. The real reason that the government was seeking a continuance was that the prosecution had no intention of prosecuting the case against Brown. In short, the government was only seeking to extend Brown’s ordeal:
In sum, the government’s motion for an indefinite continuance reveals that the government has put the Court and Brown through months of stress, anxiety and litigation over three counts it has not even intended to bring to trial. Despite being only a few days from the third trial setting, our trial preparation has disclosed that the government has not contacted any of the persons who have knowledge of the transaction and who it presented in its case-in-chief in 2004. Indeed, it has not even contacted its “star witness,” Ben Glisan, from Brown I “in years.” Nor has it contacted its lone Merrill Lynch witness, Tina Trinkle, about Brown’s trial. Trinkle was the only individual whose testimony even alleged that Brown might have participated in one internal Merrill call regarding the government’s purported criminal conspiracy.
The government’s failure even to notify its key witnesses of the long-scheduled September 20 trial suggests that the government has been using the court to run an outrageous “bluff”-demonstrating the Department’s continuing disingenuous gamesmanship with Brown’s life and liberty. No continuance shall be granted for “lack of diligent preparation or failure to obtain available witnesses on the part of the attorney for the Government.” . . . This Court must now enforce Brown’s right to a trial as scheduled and deny the government’s motion.
Not surprisingly, U.S. District Judge denied the government’s request for a continuance on Wednesday. The government then filed its motion to dismiss the case entirely shortly thereafter, which Judge Werlein immediately granted.
So, what was the government’s purpose in putting James Brown and his family through the wringer over the past seven years?
Ayn Rand’s observation about socialists who use state power to further their supposedly altruistic goals seems particularly apt:
“[T]he truth about their souls is worse than the obscene excuse you have allowed them, the excuse that the end justifies the means and that the horrors they practice are means to nobler ends.”
“The truth is that those horrors are their ends.”
Update: Larry Ribstein, who also has been appalled at the government’s conduct of this and related criminal cases for years, provides his customary keen insight to these latest developments.