Category Archives: Business – General

Again, Why is Timothy Geithner Still Treasury Secretary?

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Tim Geithner_3_3.jpgRegular readers know that I’m not a big fan of Treasury Secretary Geithner.

But after poorly-conceived governmental programs subsidizing mortgage loans played a not insubstantial part in the worst financial crisis in a generation, this recent NY Times article left me speechless for a few days:

Treasury Secretary Timothy F. Geithner, speaking Tuesday at a conference to discuss the possibilities [of reforming the government’s role in housing finance], made clear that the administration was not pondering such radical kinds of surgery as it develops a proposal it hopes to unveil in January.

Rather, Mr. Geithner and the conference after his remarks focused largely on drafting a new and improved version of the current system, in which the government subsidizes mortgage loans made by private companies.

Mr. Geithner said continued government support was important to make sure that Americans can borrow at reasonable interest rates to buy a house even in a downturn. The absence of such support, Mr. Geithner said, would deepen future recessions because unsubsidized private companies would curtail lending.

I mean really. After what we’ve been through, why on earth should the government be involved in mortgage markets in any respect?

Government intervention in mortgage markets is simply a thinly-disguised redistribution of income. But even if you think government should be doing such things, creating moral hazard in mortgage markets is a very costly way to accomplish that goal.

Stated simply, the social benefits of home ownership result from homeowners building equity in their homes through saving and enhancing neighborhoods. Those social benefits are not generated from homeowners who borrow excessively to speculate on housing in which they have no equity.

As with proponents of publicly-financed sports stadiums, proponents of such redistribution policies should simply make their case that redistribution is sound public policy and not disguise it in expensive mortgage subsidies. They don’t because of fear that voters would reject such a redistribution policy if they came to understand the true cost of these subsidies.

Truth in advertising in politics is rare, indeed.

The financial implications of NFL injury risk

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kearse_injury_300As we endure the annual, mind-numbing boredom of NFL pre-season football, my thoughts about football are elsewhere.

That is, why on earth do NFL teams expose their valuable players to such extreme risk of injury when the games do not even count?

The local Texans lost their first second round draft choice to injury for the season this past weekend. And for what?

The elephant in the closet in regard to football overall and the NFL in particular is the increasing recognition of the high injury risk that players are taking. Although this NY Times article involves primarily former MLB star Lou Gehrig and speculation whether he really died of amyotrophic lateral sclerosis, the article provides an overview of new clinical evidence that the brain damage being suffered by NFL players is severe:

Doctors at the Veterans Affairs Medical Center in Bedford, Mass., and the Boston University School of Medicine, the primary researchers of brain damage among deceased National Football League players, said that markings in the spinal cords of two players and one boxer who also received a diagnosis of A.L.S. indicated that those men did not have A.L.S. at all. They had a different fatal disease, doctors said, caused by concussion like trauma, that erodes the central nervous system in similar ways.

The finding could prompt a redirection in the study of motor degeneration in athletes and military veterans being given diagnoses of A.L.S. at rates considerably higher than normal, said several experts in A.L.S. who had seen early versions of the paper. Patients with significant histories of brain trauma could be considered for different types of treatment in the future, perhaps leading toward new pathways for a cure. [ . . .]

A link between professional football and A.L.S. follows recent discoveries of on-field brain trauma leading to dementia and other cognitive decline in some N.F.L. veterans. Dr. McKee and her group identified 14 former N.F.L. players since 1960 as having been given diagnoses of A.L.S., a total about eight times higher than what would be expected among men in the United States of similar ages.

However, the doctors cautioned, the existence of the increased number of A.L.S.-like cases should not create the same level of public alarm as the cognitive effects of brain trauma, which affect hundreds of former professionals and perhaps thousands of boys and girls across many youth sports.

Although even players commonly continue to underestimate injury risk in the NFL, my sense is that such miscalculations are being understood better and will likely recede. With NFL teams facing increasing litigation risk from injured players, will NFL teams be able to use the shield of the collective bargaining process much longer to protect the league members from the possibly severe financial implications of that risk?

And if the NFL is facing potentially dire financial implications from the increasing recognition of high injury risk, what about the implications for college football, where the compensation paid to players is regulated more rigidly than in the NFL?

Finally, will the financial implications of injury risk in football eventually prompt dramatic changes in the way the game is played?

Seems to me that these questions are a lot more interesting than pre-season football.

Will Skilling be released?

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jeff-skilling-.jpgOn the heels of his brief on the merits in support of his motion to be released from prison pending further disposition of his case by the Fifth Circuit Court of Appeals and the U.S. District Court, Jeff Skilling filed his reply brief below (download it to review the bookmarked version) to the government’s merits brief opposing his proposed release.

Skilling’s brief hammers home why he should be released:

As the standard is articulated in [Neder v. U.S., 527 U.S. 1 (1999)], the case on which the government relies, a court cannot find the presence of a factually supported invalid theory to be harmless beyond a reasonable doubt where the defendant contested the [valid theory] and raised sufficient evidence to support a contrary finding. 527 U.S. at 19. In that situation, it cannot be presumed that rational jurors necessarily would have accepted the valid theory, and so it remains impossible to tell which theory the jury selected.

As shown below, the government cannot prove that the honest services error was harmless because, for every count of conviction, the record, the instructions, evidence, and argument allowed a rational juror to reject the valid theory asserted, while relying on the invalid honest-services theory to return a conviction. Because it is thus impossible to tell whether the jurors selected the valid or invalid path to conviction for any count, every count must be reversed.

Stated simply, the government relied on the amorphous nature of an invalid theory of criminality in obtaining a conviction against Skilling on numerous different charges. Having relied on that blather, the government cannot now prove that the jury didn’t rely on it in convicting Skilling on all charges.

Although results rarely occur as they should in misdirected criminal prosecutions, Skilling really should win his release and a re-trial. Stay tuned.
Jeff Skilling’s Reply Brief on his Motion for Bail

Following up on Hurd and H-P

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HurdInteresting. The NY Times’ Joe Nocera chimes in on the demise of Mark Hurd at Hewlett-Packard.

But the blogosphere had already revealed a week ago the essence of the information in Nocera’s article. Another reflection of how the mainstream media is now often decidedly behind the blogosphere in providing key information about breaking events.

And not to pile on, but how does one of the best business reporters of the NY Times write an article about this situation and not ask the most important unanswered question? That is, why did the H-P Board accept Hurd’s resignation and provide him a $40 million severance package if the Board had grounds to terminate him for cause?

And if the Board didn’t have cause to fire Hurd, then why did Hurd’s contract not make violation of H-P’s written code of business conduct cause for termination of employment? Is that the same for other H-P contracts with its executives? At least this subsequent WSJ article gets closer to answering those questions.

My bet is that the blogosphere will ultimately provide the answer to that question more quickly than the NY Times.

 

Matt Simmons, R.I.P.

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The Houston business community is in mourning this week over the sudden death this past Sunday of Matt Simmons, the 67-year-old investment banker, author and pundit whose views were a common topic on this blog over the years.

Matt founded Simmons & Company in Houston in the mid-1970’s with his brother L.E. as one of the first investment banks focusing on the increasingly important oil-field service sector of the oil and gas industry.

Simmons & Company eventually expanded into other areas of the energy industry and, by the late 1990’s, became one of the top energy mergers and acquisitions investment banks in the country.

Around 1983 or so, Matt’s firm and my law firm were on two of the floors near the top of the 700 Louisiana building in downtown Houston, so we developed a cordial friendship over the years by taking innumerable elevator rides together.

I’ve always been involved in a fair amount of oil and gas litigation, so Matt was always interested in that part of my practice.

And during the depression in the energy industry in Texas during the 1980’s, Matt was arguably the most insightful businessperson in Houston at the time on the direction of the industry and how it’s recovery should be structured.

Matt was a joy to talk with — witty, intelligent and interesting. That’s one of the reasons why, over the past decade or so, he became a media favorite for providing his provocative opinions about the energy industry.

Matt enjoyed his new role as one of the media’s energy industry pundits, but that wasn’t the best fit for the chairman of a company that was often advising companies that could be affected by his controversial opinions.

Matt retired from day-to-day management of his company in 2005 about the time his peak-oil treatise was published, but he continued on as executive chairman to help the company maintain client relationships. Matt and the company formally split ties earlier this year when he made his utterly unsurprising public comments in Fortune magazine about the probability of a British Petroleum bankruptcy.

Sadly, I didn’t see Matt again after the split, so I was never able to ask him about it. But my sense is that it was probably not that big a deal for him. He was working hard on his Ocean Energy Institute and I really think that is where his heart was as he segued into elder statesman status in the energy industry.

So, the local energy industry has lost a big part of its personality with the death of Matt Simmons. Many folks in the industry did not agree with some of Matt’s often controversial views, but that never stopped him from expressing those views and forcing energy businesspeople to think about the issues and formulate alternative viewpoints toward them. That is a resource that is vitally important to all industries, particularly one that is facing the current challenges of the U.S. energy industry.

Yes, Matt Simmons will be missed. Rest in peace, friend.

Where Are All the Villains?

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Could it be that folks are finally realizing that old-fashioned greediness really should not be a crime?

Of course, the rationalization for the lack of villains now as compared to earlier crises has never been particularly compelling.

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. Taking 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 diversification.

Ignorance about business risk has led in part to the criminalization of business lottery. Such a lottery breeds cynicism and disrespect for the rule of law.

Isn’t it about time that dubious policy be put to permanent rest?

The Tiger Mike Memos

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Tiger MikeThe oil and gas business in Houston has generated its share of characters over the past century. But few have been as colorful as Edward “Tiger Mike” Davis.

Tiger Mike owned an independent exploration and production company in Houston during the boom days of the late 1970’s and early 80’s, and then directed his company through a volatile chapter 11 case during the depression in the oil and gas industry in the mid-80’s. I have always thought that one of the most impressive credentials of Fifth Circuit Court of Appeals Chief Judge Edith Jones is that she represented Tiger Mike during his company’s chapter 11 case. Based on her representation of Tiger Mike alone, Edith definitely understands the challenge of representing a difficult client.

Legend has it that Tiger Mike was born in Lebanon, had no formal education and eventually emigrated to the US, where he was a cabbie in Denver. He was hired by wealthy Helen Bonfils’ husband and remained her chauffeur after his death, which eventually led to his marriage with the 70 year-old widow. After her death, Tiger Mike inherited a part of her fortune, which he invested in several drilling rigs that he later sold at a substantial profit. That was his stake into the exploration and production business, where he proceeded to drill 50-odd dry holes and spiraled into bankruptcy.

The stories of Tiger Mike resonate in Houston oil and gas circles to this day. At one point, Tiger Mike was allegedly carrying on a torrid affair with one of the McGuire sisters (a popular singing group from the 1960’s) at the same time as Ms McGuire was the mistress of Sam Giancana, the notorious Chicago Mafia boss. No one was ever quite sure whether Tiger Mike had Sam’s consent to that arrangement.

Another time, during a particularly difficult work-out negotiations over a botched drilling project, Tiger Mike waltzed into a conference room filled with creditors and their lawyers in his trademark one-piece khaki polyester leisure suit with white shoes and belt. He proceeded to throw his briefcase on the conference room table, grabbed a 45 caliber pistol out of the briefcase and slammed it on the table to the astonishment of everyone in the room.

“Now,”ù exclaimed Tiger Mike. “It’s time to deal!”ù

All of which is a prelude to the the always-observant Letters of Note‘s posting of the hilarious Tiger Mike Memos,ù a series of 22 interoffice memos that the “incredibly amusing, painfully tactless, and seemingly constantly angry”ù Tiger Mike sent to his employees over the years.ù

To those of us in Houston who remember Tiger Mike, none of them are surprising in the slightest. But they are fun. Enjoy!  

Jeff Skilling requests his release from prison

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skillingDuring my unexpected absence from the blogosphere last week, the Seventh Circuit Court of Appeals released Conrad Black from prison pending his re-trial on various business fraud charges.

That got me to thinking about what was going on in Jeff Skilling’s case on the same issue, so I checked in at the Fifth Circuit and found that Skilling has also requested his release from prison. That motion — as well as Skilling’s memorandum of law on why all remaining counts against him should be reversed and the entire case remanded for retrial — are below.

These two documents arguably provide the best description yet of the unjust nature of the criminal case against Skilling. In short, the government knew that it had a flimsy case against Skilling on conventional securities fraud (he simply believed in and touted his company like any other CEO) and wire fraud charges (he didn’t steal a dime from Enron).

So, the government relied on the defective honest services wire-fraud theory to convict Skilling of crimes based on amorphous, non-criminal acts such as not acting in the best interests of the company or promoting an unhealthy culture at Enron. Having relied heavily on the now-discredited honest services wire-fraud theory in obtaining convictions against Skilling on the more conventional charges, the government simply cannot prove beyond a reasonable doubt (it’s burden on remand under such circumstances) that the jury did not rely on the acts relating to the honest services wire-fraud charges in convicting Skilling on the other charges.

It looks to me as if this case should be going back to the District Court for re-trial on all charges. Skilling and the government have agreed to an expedited briefing schedule on the issues and Skilling has requested that the Fifth Circuit review the matter on an expedited basis. Thus, look for a decision sometime next month.

Jeff Skilling’s Motion to the Fifth Circuit Court of Appeals for Release Pending Retrial

Jeff Skilling Opening Merits Brief on Remand

Those darn unintended consequences

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Dollar BillsYesterday’s post touches on the enormous direct costs attributable to the federal government’s questionable policy of regulating business through criminalization of bad or simply incorrect business judgments.

However, as enormous as those direct costs are, the indirect costs of criminalizing bad business judgments dwarfs the direct ones.

Whether management makes such judgments correctly is a fundamental risk of business ownership. Criminalizing that risk — through the prism of hindsight bias — will simply make executives in the future less likely to take the risks necessary to build wealth and create jobs while not deterring in the slightest the Bernie Madoffs of the world from embezzling money.

Business owners deserve protection from theft, but not from risk taking, and it’s not clear that government prosecutors know — or even care about — the difference.

Those indirect costs came to mind again as I read this Wall Street Journal article (H/T Russ Roberts) on the unintended consequences arising from the government?s new regulations concerning rating agencies:

Ford Motor Co.’s financing arm pulled plans to issue new debt, the first casualty of a bond market thrown into turmoil by the financial overhaul signed into law Wednesday.

Market participants said the auto maker pulled a recent deal, backed by packages of auto loans, because it was unable to use credit ratings in its offering documents, a legal requirement for such sales. The company declined to comment.

The nation’s dominant ratings firms have in recent days refused to allow their ratings to be used in bond registration statements. The firms, including Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, fear they will be exposed to new liability created by the Dodd-Frank law.

The law says that the ratings firms can be held legally liable for the quality of their ratings. In response, the firms yanked their consent to use the ratings, hoping for a reprieve from the Securities and Exchange Commission or Congress. The trouble is that asset-backed bonds are required by law to include ratings in official documents.

The result has been a shutdown of the market for asset-backed securities, a $1.4 trillion market that only recently clawed its way back to health after being nearly shuttered by the financial crisis.

Professor Roberts sums it up in his post by quoting Hayek:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The changing face of internal medicine

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health_insuranceAs noted here and here, my internist converted his practice to a successful concierge practice three years ago. In this recent KevinMD.com post, Dr. Steve Knope speculates that soon patients who are not a part of a concierge practice will not know their doctor if they have to go into the hospital:

What are the consequences for patients? What happens to the average person in Tucson, Arizona when he or she gets chest pain, develops pneumonia or has a seizure? Can they reach their internist or family practitioner for a medical emergency? Most patients who call their primary care doctor for a medical emergency can’t even reach his staff during normal office hours. Instead, they will hear a recording on an answering machine, directing them to go to call “911” for any medical emergency.

Once in the ER, the doctorless patient will be admitted to a hospital physician, who is unknown to them. This so-called hospitalist, who is a salaried shift-worker, will put in his 12 hours, and then go home. He is a doctor who knows nothing about the patient’s medical history. He has never met the patient. There will be no call from the hospital doctor to the primary care doctor in the office to get a thorough medical history. There will be no medical records transferred to the hospitalist. The hospitalist will attempt to get the best medical history he can from the patient, make some quick medical decisions, and then pass the patient off to one of his colleagues when his shift ends. And so it goes. No continuity of care, no understanding of the patient; the sick person now becomes a “case of pneumonia” or “the stroke in bed 3” to a group of unknown, rotating professionals.

Knope goes on to predict that as doctors flee from primary care (see earlier post here and here), the vacuum will be filled by nurse practitioners and medical assistants, who are far less trained in diagnostic procedures.

I don’t know about you, but I’m making sure that my payments on my concierge practice account are current.