Category Archives: Business – General

Thoughts on health care finance reform

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stethoscope_3 Inasmuch as Americaís fractured health care finance system has been a common topic on this blog since early 2004, many friends and readers have asked my thoughts about the health care reform legislation that was passed yesterday. So here goes.

The legislation is fundamentally flawed because it imprudently foists a top-down reorganization plan on something as complex and disparate as financing health care. But frankly, I have no idea whether it will result in a worse finance system than the current one, which is pretty bad.

My biggest criticism with both the current system and the one contemplated by Obamacare is that the patient is not the customer, at least as it relates to non-catastrophic illness and injury. Without cost control ñ and customer decision-making is the most efficient one available – neither the current system nor Obamacare will be able to maintain delivery of high-quality care to an increasingly aging population.

However, the reality is that we now have two solid generations of Americans now who enjoy having someone else pay for their health care. So, itís unrealistic to think that such a societal shift is going to change anytime soon. But itís still important to understand how we got to this point.

Employer-based health insurance became popular during World War II because it was initially exempted from gross income as a way to circumvent wartime wage and price controls. After the war, marginal income tax rates were high and individual medical expenses were tax deductible, so at least some rational incentives were returned to the medical marketplace.

But all this changed in 1986 when the Reagan Administration made concessions to achieve bipartisan tax reform. Individual medical expenses were no longer deductible until they reached 7.5% of gross income, which virtually eliminated individual incentives in the medical marketplace. Not surprisingly, everyone was incentivized after tax reform to move all medical expenses to third-party-payor health insurance. As a result, individual out-of-pocket expenses in the health care market dropped from 22% in 1985 to less than than 10% of the market now.

So, in essence, the Reagan Administration horse-traded personal tax deductibility of medical expenses away, but figured that was acceptable because at least employer health insurance remained tax-free benefit. Iím sure if we could ask him now, President Reagan would tell you that he expected a future Congress would fix such perverse incentives after the dust settled on the benefits of tax reform. But alas, that never happened.

What happens now? The only certainly is that special interests will be descending upon Washington in droves to do their bidding over the transfers of wealth that will occur under the new legislation. At least it will be entertaining to watch who wins and loses.

But there are two big points that everyone should remember as we embark on this new world of health care finance.

First, the Obama Administrationís rationalization of future cuts in Medicare spending as a funding source for the health care legislation is utterly disingenuous, as Arnold Kling artfully explains:

Imagine that your crazy uncle Fred had bought a dozen cars on credit. As a result, he faces car payments far in excess of what he can afford. He comes to you and says he has a plan that in a couple of years will reduce his car payments by a few thousand dollars. "Now I have the money for a down payment on a boat!" he exclaims, as he runs off to the boat dealer.

The equivalent is for Congress to treat future cuts in Medicare as if they were a newfound source of wealth to be tapped. Once they adopt this precedent, they can increase spending on whatever they want, in unlimited amounts, while claiming deficit neutrality. Future Medicare spending is so high that you can always come up with cuts, as long as they deferred.

Second, as Greg Mankiw notes, projected Medicare cuts in payment rates for physician services portend the rationing of medical services that the promoters of the current legislation contend wonít occur. Because few consumers actually pay for their health care, most folks donít realize that Medicare and Medicaid payment rates for physician services have already been cut by around 30% since the late 1990ís. That has led many doctors to limit substantially the number of Medicare and Medicaid patients who they are willing to treat in their practices. In my view, that trend is likely to continue under the new legislation. Who will tend to the medical needs of consumers who elect to rely on such insurance in the future?

Supporters of Obamacare generally argue that the legislation offers more equality through expanded insurance and redistribution of benefits. But the wealthy will always find ways to get around the rationing and other restrictions of a government-run health care system. On the other hand, the poor will have no choice but to accept the government health care, which is unlikely to be as high a quality as what the rich folks obtain from their private doctors. Accordingly, although the distribution of health care may be a bit more equal in the short term, I’m not sure that means more equality in health care in the long run.

Which leads me to this question: How long will it be before the federal government requires physicians, as a condition to being allowed to engage in private practice, to accept a certain number of patients under government-sponsored insurance plans that limit payments to the physicians far below what the physicians would otherwise accept?

The bad Metro bet

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metro-map-2012-revised Following on this post from last week, there were a couple of good pieces from over weekend on the cascading boondoggle that is Houston’s Metropolitan Transit Authority.

In this post, the always-insightful Tory Gattis comments on Randal O’Toole’s Wall Street Journal op-ed from over the weekend in which O’Toole focuses on the short-sighted nature of huge investment in light rail systems. At a time of fast technological innovation, why should a community place a substantial amount of its chips on an increasingly obsolescent form of mass transit such as light rail?

Meanwhile, Bill King followed his fine blog post from last week with this devastating Sunday Chronicle op-ed in which he disassembles each of the primary myths that Metro supporters use when defending the light rail system. In particular, King explains why the 2003 referendum is not a reasonable justification for what Metro is proposing now with regard to its light rail system:

The 2003 referendum had three elements: (1) a $1.2 billion LRT system; (2) a roughly 50 percent increase in bus service; and (3) initiating a plan for commuter rail.

Metro has completely abandoned the bus expansion: We have fewer buses and bus riders today than we did in 2003. It also has done absolutely nothing to further the development of any commuter rail lines and has instead gotten in the way of other groups like Harris County when they have tried to initiate some action. The voters in 2003 did not approve just a light rail plan; they approved a comprehensive, multimodal system. Metro, for its own reasons, has abandoned what the voters approved in favor of its own grandiose vision.

Additionally, it should be noted that the voters specifically restricted Metro to borrowing $640 million to build the light rail system. Metro now plans to subvert that limitation by entering into a sale/lease-back arrangement with a separate subsidiary and actually borrow more than four times what the voters approved. Metro is always quick to invoke the moral authority of the 2003 referendum but casually ignores its inconvenient restrictions.

Meanwhile, the Chronicle editorial board continues to live in a rather odd state of denial with regard to Metro. In this vacuous op-ed, the Chron attempts to put a cheery face on Mayor Parker’s appointment of several new members to the Metro board (one is actually a regular Metro rider — how about that?!) and her negotiations with federal officials regarding funding of further light rail lines.

Without any financial analysis whatsoever, the Chron asserts that Mayor Parker is moving forward with a full build-out of light rail in a fiscally responsible manner. But even a cursory review of the data proves just the opposite.

As Peter Gordon has long maintained, citizens should require their leaders to answer the following basic questions before allowing them to obligate citizens to funding boondoggles such as light rail: 1) At what cost?, 2) Compared to what? and 3) How do you know?

The Chronicle editorial board is taking a pass on asking Metro’s leaders those questions. Thankfully, Bill King and Tory Gattis are not.

The Metro Train Wreck

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metrorail6The 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.

My Lehman Bullshit

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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 Enronization of Lehman Brothers

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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:

The National Enquirer one ups the MSM

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enquirer-499x414 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?

The Last Four Minutes of Air France Flight 447

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Airbus_3 I’ve been meaning to pass along for awhile  this superb Gearld Traufette/Spiegel Online article on the continuing investigation into last summer’s horrific crash of Air France 447 into the Atlantic Ocean (earlier post here).

Although the black box still has not been recovered (and quite likely won’t be), investigators are becoming more confident that they understand what happened, including the following interesting theory:

According to this scenario, the pilots would have been forced to watch helplessly as their plane lost its lift. That theory is supported by the fact that the airplane remained intact to the very end. Given all the turbulence, it is therefore possible that the passengers remained oblivious to what was happening. After all, the oxygen masks that have been recovered had not dropped down from the ceiling because of a loss of pressure. What’s more, the stewardesses weren’t sitting on their emergency seats, and the lifejackets remained untouched. "There is no evidence whatsoever that the passengers in the cabin had been prepared for an emergency landing," says BEA boss Jean-Paul Troadec.

Read the entire article, including this informative graphic.

The NBA Bubble

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A_ToyotaCenter Looking for the next bubble to burst?

How about the National Basketball Association, where the local Houston Rockets play in what has been nicknamed ìThe Library on LaBranchî because of the lack of fan interest at their home games.

ESPNís Bill Simmons dissects and then sums up the leagueís dilemma well:

.  .  . The current system doesn’t fly. The salary cap and luxury threshold ebb and flow with yearly revenue — so if revenue drops, teams have less to spend — only there’s no ebb and flow with the salaries. When the revenue dips like it did these past two seasons, the owners are screwed.

They arrived at this specific point after salaries ballooned over the past 15 years — not for superstars, but for complementary players who don’t sell tickets, can’t carry a franchise, and, in a worst-case scenario, operate as a sunk cost. These players get overpaid for one reason: Most teams throw money around like drunken sailors at a strip joint. When David Stern says, "We’re losing $400 million this season," he really means, "We stupidly kept overpaying guys who weren’t worth it, and then the economy turned, and now we’re screwed."

This isn’t about improving the revenue split between players and owners. It’s about Andre Iguodala, Emeka Okafor, Elton Brand, Andrei Kirilenko, Tyson Chandler, Larry Hughes, Michael Redd, Corey Maggette and Luol Deng making eight figures a year but being unable to sell tickets, create local buzz or lead a team to anything better than 35 wins.

It’s about Jermaine O’Neal making more money this season than Kevin Durant, Russell Westbrook, James Harden, Serge Ibaka, Eric Maynor, Thabo Sefolosha and Jeff Green combined.

It’s about Rasheed Wallace — a guy who quit on his team last season, then showed up for this one with 34Cs and love handles — roping the Celtics into a $20 million, three-year deal that will cost Boston twice that money in luxury tax penalties.

With at least a dozen or so NBA teams facing serious financial problems, my sense is that the league is facing a radical restructuring whether the players like it or not. Of course, a substantial component of those teamsí financial problems is attributable to the transfer of capital that many teams made to players as a result of not needing to rat-hole capital for arenas that local governments naively financed instead.

Sort of makes one re-think this boondoggle, eh?

Jeff Skilling Day at SCOTUS

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Got to love the response of Sri Srinivasan — who handled yesterday’s oral argument for Jeff Skilling in his appeal to the U.S. Supreme Court — to the government’s contention that a five-hour voir dire of the jury was sufficient in Skilling’s trial to rebut the presumption of community prejudice against Skilling.

According to Lyle Denniston, whose account of the argument is the most comprehensive that I’ve seen, Srinivasan pointed out that the far less complicated criminal trial of Martha Stewart involved six days of juror selection in a case where there was no evidence of “deep-seated passion and prejudice” among jurors.

As Denniston notes, the SCOTUS Justices are usually hard to read during oral argument and the Skilling argument was no different. Jeffrey Toobin observes in his recent book on the Supreme Court, Supreme Court decisions are often more the product of coalition-building between the Justices than the legal theories.

From reading Denniston’s account and from talking with a couple of friends who attended the argument, I’m guessing that the Justices have already decided either to invalidate or dramatically limit the honest-services wire fraud statute (18 U.S.C. 1346), and that much or all of Skilling’s conviction will be overturned on that basis.

If I’m right on that, then the Justices are now only deciding whether to knock out Skilling’s conviction entirely on the District Court’s refusal to change venue from Houston or to conduct a thorough voir dire of jurors and leave the honest services issues for the other two pending cases involving the same issue.

But ignored among all the media reports on the Skilling SCOTUS argument is that the Skilling case is far from over even if SCOTUS were to uphold Skilling’s conviction. Put on hold pending the outcome of the SCOTUS appeal is the Fifth Circuit’s order to U.S. District Judge Sim Lake to re-sentence Skilling because of errors in the calculation of the length of the sentence.

But even more importantly, the Skilling team is awaiting the outcome of the Supreme Court appeal before filing what will certainly be a scalding motion for new trial in the District Court based on pervasive prosecutorial misconduct involved in the Enron Task Force’s prosecution of Skilling.

And that could well be more revealing than any Supreme Court argument.

Gearing Up for the Skilling SCOTUS Argument

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Oral argument on Jeff Skilling’s appeal of his criminal conviction to the United States Supreme Court is next Monday afternoon, so the Skilling legal team warmed up for the occasion by filing the brief below in response to the Department of Justice’s brief on the merits.

If you want to read the entire brief, then I recommend downloading it so that you will be have the version bookmarked in Adobe Acrobat that facilitates review.

The DOJ’s case against Skilling has shrunk considerably, which is highlighted by the following Skilling reply brief passage on the DOJ’s tepid defense of Skilling’s conviction for honest services wire fraud under 18 U.S.C. 1346:

The Government’s application of its proposed self-dealing category to Skilling’s case demonstrates the continued manipulability of the statute under the Government’s approach. In Black and Weyhrauch, the Government expressed the view that 1346 prohibits only bribes/kickbacks and self dealing, and that the latter category is implicated only when conflicting financial interests are “undisclosed.” [references omitted].

That statement suggested that the Government would concede that Skilling did not commit honest-services fraud, because Skilling’s only alleged personal financial interests arose from Enron’s linking of his compensation to Enron’s stock value, an interest that was fully disclosed.

But the Government nevertheless argues that Skilling committed honest-services fraud. To bring Skilling’s case within the statute’s compass, the Government creates a third category of honest services fraud, one that involves disclosed personal financial interests.

The Government’s cursory explanation of Skilling’s honest-services liability (GB50) is hardly clear, but it appears to contend that while Skilling’s “personal financial interests” were disclosed and generally aligned with Enron’s interests, he put those interests in conflict when he took actions pursuant to his own disclosed compensation interest that were allegedly contrary to Enron’s. Accordingly, in this new category, what the defendant apparently fails to disclose is his scheme to put his own compensation interests ahead of his employer’s distinct interests.

Not only is that standard itself vague on its own terms, but the Government’s repeated acknowledgement that Skilling’s case has no precedent in pre-McNally case law (GB17, 49) confirms that this special crime is its own new category, created for the first time in the Government’s brief in this Court.

It is time for prosecutors to stop making up crimes under this statute. If 1346 is not invalidated altogether, it should be limited to the single category of conduct universally recognized in the case law and hence largely immune from manipulation quid pro quo bribes and kickbacks.

Stated simply, the Enron Task Force prosecuted Skilling for business judgments that he made that turned out badly for Enron viewed through the clarity of hindsight bias. But Skilling didn’t steal a dime from Enron and never took a kickback or a bribe. Those latter acts are crimes. Taking business risks that turn out badly is not.

At a time in which the U.S. economy desperately needs risk-takers to generate jobs and create wealth, here’s hoping that the Supreme Court understands the difference.

Jeff Skilling’s Reply Brief to the DOJ’s Brief in his Supreme Court Appeal