Category Archives: Business – General

Pro Dome? Or just anti-Emmett?

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dome%20020508.jpegI understand that Ed Emmett is not the Chronicle’s favored candidate for Harris County Judge. But isn’t it a bit odd for the Chron to be fanning criticism of Emmett for showing rare leadership over the pie-in-the-sky Astrodome hotel redevelopment deal (previous posts here)?
Look, this is really very simple. No equity investor or financial institution in their right mind is going to invest upwards of half a billion dollars to redevelop the Dome into a convention hotel. If there were such investors, they would have stepped up in the over three years that this proposal has been floating about town and the financial markets. The fact that the Astrodome hotel would not even have the primary right to use the Reliant Park space that it sits upon for over a month out of the year (roughly 22 days for the Houston Live Stock Show & Rodeo and another dozen or so days for the Texans) only makes the hotel proposal more speculative in nature. That several County Commissioners continue to think that it’s a good idea to pursue the Astrodome hotel project does not make it one. Rather, it simply shows why they are County Commissioners and not businesspeople responsible for creating jobs and turning a profit.
And reliance on a poll of Houstonians to keep the Astrodome hotel dream alive is just plain silly. Sure, most Houstonians would like to preserve the Dome. It’s a landmark and an architectural treasure. But I doubt that poll revealed to its participants that mothballing the Dome over the past three years has already cost the County $12-15 million that could have been spent on improving roads, flood control or park improvements. Similarly, that poll almost certainly did not disclose to its participants the financial risk that the County would be taking if an Astrodome convention hotel craters, as many such hotels tend to do. If a poll is taken with such information supplied to its participants, then my bet is that the number of Houstonians wanting to preserve this financial black hole would diminish rapidly.
Emmett is showing leadership in moving the decision-making process on the Dome along. The Chronicle is playing politics in criticizing him for it. Set a reasonable deadline for proposals, consider them and then either move forward with one that makes financial sense or raze the Dome and build a parking ramp for Reliant Park that would generate revenue to pay off the bonded indebtedness that remains on the Dome. That may not be the sexist thing alternative, but it’s the responsible thing to do.

Can Schiller and Del Grande save Cafe Express?

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cafe_express_logo.gifAt one time earlier this decade, the Cafe Express restaurants were among the best “upscale” fast food restaurants in Houston, perhaps anywhere. Then, in 2004, Wendy’s International purchased a majority stake in Cafe Express from the original owners, Lonnie Schiller and Robert Del Grande, who also own the popular upscale Houston restaurant, Cafe Annie.
Wendy’s promptly operated the Cafe Express restaurants like, well, like Wendy’s. No one would confuse their local Wendy’s with an upscale fast food restaurant. It became clear quickly that Wendy’s did not have a clue of how to manage an upscale fast food restaurant chain. Cafe Express suffered.
Reflecting that hope springs eternal, this David Kaplan/Chronicle article reports that Schiller and Del Grande have purchased Cafe Express from Wendy’s (hopefully at a BIG discount). It’s a different and more competitive market in the “upscale” fast food industry now than when Schiller and Del Grand sold to Wendy’s, so there is no certainly that Schiller and Del Grande will be able to infuse Cafe Express with its lost luster. But I’m pulling for them.

JÈrÙme Kerviel channels Tom Cruise

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tom-cruise-acting%20crazy.jpgIn this clever Financial Times op-ed, John Gapper lucidly explains why the business world will always be dealing with risk-takers such as JÈrÙme Kerviel, the alleged ìrogue traderî at SociÈtÈ GÈnÈrale whose trades are responsible for the $7 billion plus hit that the bank took earlier this month.
According to Gapper, it’s because Kerviel went crazy like actor Tom Cruise, except there was a method to Kerviel’s madness. Although Kerviel’s trades were bizarre and risky, they had a certain crazy logic because traders have big incentives to risk everything for stardom:

In recent days we have witnessed two men taking leave of their senses. In one case, however, there was method to the madness.
The first is Tom Cruise, the Hollywood film star and devoted Scientologist. In a clip made for members of the cult-like religious movement, Mr Cruise can be seen laughing manically and claiming special powers to help the victims of road traffic accidents because of his faith. He seems utterly deluded.
The second is JÈrÙme Kerviel, the ìrogue traderî at SociÈtÈ GÈnÈrale accused of losing his bank Ä4.9bn. Mr Kerviel did not make money for himself by his trading. Instead, as Jean-Claude Marin, the Paris prosecutor, said this week: ìHe wanted to show that he was worth as much as the others around him. He truly believed that … everyone would recognize his financial genius.î
Crazy, right? That is what Mr Kervielís former bosses, most of whom are either out of a job already or soon will be, think. Rather than sticking to his assigned role as a lowly arbitrage trader, Mr Kerviel tried to become a star. ìI think that he is completely mad,î says one banker.
Well, not completely. Actually, there is a good argument that Mr Kerviel acted in a financially rational manner, although he broke both his contract and ñ allegedly ñ the law. He had as firm a grasp of superstar economics as Mr Cruise, one of the worldís best-paid film actors.
The basic principle of superstar economics, which applies to both entertainment and investment banking, is that a few people take most of the rewards. If you can establish yourself as a top talent either on screen or on a trading floor, you gain status and get rich.

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Protesting the absolute priority rule while wintering in Houston

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totem%20pole%20013108.JPGThis Tom Fowler/Chronicle article reports on a retired commercial painter from Ohio is engaging in a rather novel protest of the absolute priority rule, the bankruptcy principle that prevents shareholders from receiving any value under a bankruptcy plan unless creditors either are paid in full or agree that the shareholders can receive something:

Calpine Corp.’s emergence from bankruptcy protection in the coming days will end a tough chapter in the history of Texas’ No. 3 power producer, but don’t expect applause from shareholder Robert Strouse.
The retired commercial painter from Ohio likely will continue his vigil in front of the company’s downtown Houston offices where he’s been protesting the bankruptcy plan for the past two weeks.
“They’d like me to go away, but I’m going to hang on as long as I can,” said Strouse, 62.
Strouse claims the company misled him about the price he could expect for his stock when Calpine emerges from bankruptcy ó a charge the company denies. [. . .]
Strouse said his quarrel with Calpine began last month after a phone conversation with an investor relations official. He said he was told his 5,000 shares probably would be valued at about $1.60 each under the company’s reorganization plan. That’s a far cry from the $5.12 each he paid for them in March 2004, but better than nothing, he figured, so he voted in favor of the plan.
The plan that came out of the bankruptcy court in December, however, wasn’t what he expected. It will cancel outstanding shares of common stock like his and replace them with warrants ó the right to purchase new Calpine stock ó but at a price likely higher than that at which the stock will begin trading.
“They lied to me, plain and simple,” Strouse said.

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The stadium ruse

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Houston%20Dynamo%20stadium%20013108.gifSomething to think about in regard to the City of Houston’s latest stadium boondoggle.
Skip Sauer over at The Sports Economist notes this Rick Eckstein op-ed on the myth of economic benefits from the public financing of sports stadiums:

. . . [M]y colleagues and I studied media coverage of 23 publicly financed stadium initiatives in 16 different cities, including Philadelphia. We found that the mainstream media in most of these cities is noticeably biased toward supporting publicly financed stadiums, which has a significant impact on the initiatives’ success.
This bias usually takes the form of uncritically parroting stadium proponents’ economic and social promises, quoting stadium supporters far more frequently than stadium opponents, overlooking the numerous objective academic studies on the topic, and failing to independently examine the multitude of failed stadium-centered promises throughout the country, especially those in oft-cited “success cities” such as Denver and Cleveland.

Meanwhile, Houston is bidding on another Super Bowl (XLVI in 2012). Get those yachts lined up, folks.

The products of an entertaining form of corruption

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Okie%20STate%20stadium%20013008.jpgInasmuch as the corrupt sponsorship of big-time football and basketball by academic institutions is a common topic on this blog, the following articles caught my eye:

The Chronicle’s Richard Justice surveys several of the ugly recent incidents in big-time college football and calls for higher ethical standards. However, he ignores the perverse incentives built into the highly-regulated system that promote the unethical behavior.
Meanwhile, one of the coaches who has been accused of being ethically-challenged — former Texas Aggie coach Dennis Franchione — turns out to be an over-achiever with an interesting story.
And how exactly is it that Rick Neuheisel was able to persuade UCLA to hire him as its new coach in the face of this curriculum vitae?

Look, June Jones, Rich Rodriguez, Franchione, Neuheisel and the other supposedly unethical coaches of the moment are not, on balance, any more unethical than the rest of us. They are simply the products of a highly-regulated system that creates all sorts of perverse incentives to act badly. Change those incentives and the coaches’ behavior will change. A good start would be to quit paying the coaches the excess rents that should be paid to the players whose talents generate them.

What’s Fertitta’s real plan for Landry’s?

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Landry%27s%20logo%20012908.gifGiven this experience, Landry’s Restaurants CEO Tilman Fertitta’s offer to take Landry’s private in a deal valued at $1.3 billion is not particularly surprising.
But the question is this: Would Fertitta, who owns just under 40% of Landry’s, actually prefer what Jim Crane didn’t want?

The Power of Myths

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A common topic on this blog has been the power of anti-business myths within American society.

Take Enron, for example. We all know how the myth played out. Enron, which was one of the largest publicly-owned companies in the U.S., was really just an elaborate financial house of cards that a massive conspiracy hid from innocent and unsuspecting investors and employees.

The Enron Myth is so widely accepted that otherwise intelligent people reject any notion of ambiguity or fair-minded analysis in addressing facts and issues that call the morality play into question. The primary dynamics by which the myth is perpetuated are scapegoating and resentment, which are common themes of almost every mainstream media report on Enron.

The mainstream media — always quick to embrace a simple morality play with innocent victims and dastardly villains — was not about to complicate the story by pointing out that the investors in Enron could have hedged their risk of loss by buying insurance quite similar to that which Enron developed in creating their wealth in the first place.

Instead of attempting to examine and tell the nuanced story about what really happened at Enron, much of the mainstream media simply became a part of the mob that ultimately contributed to death of Ken Lay and hailed the barbaric 24 year sentence of Jeff Skilling.

Ambitious prosecutors, given wide latitude to obtain convictions of key Enron executives regardless of the evidence, gladly took advantage of the firestorm of anti-Enron public opinion to lead the mob.

Consequently, as Wall Street continues to endure massive equity write-downs that dwarf the $1.1 billion non-recurring charge against earnings that triggered Enron’s demise after the 3rd quarter of 2001, I was somewhat surprised to read this common sense analysis from NY Times columnist, David Brooks:

There is roughly a 100 percent chance that weíre going to spend much of this year talking about the subprime mortgage crisis, the financial markets and the worsening economy. The only question is which narrative is going to prevail, the Greed Narrative or the Ecology Narrative.

The Greed Narrative goes something like this: The financial markets are dominated by absurdly overpaid zillionaires. They invent complex financial instruments, like globally securitized subprime mortgages that few really understand. They dump these things onto the unsuspecting, sending destabilizing waves of money sloshing around the globe. Economies melt down. Regular people lose jobs and savings. Meanwhile, the financial insiders still get their obscene bonuses, rain or shine.

The morality of the Greed Narrative is straightforward. A small number of predators destabilize the economy and reap big bonuses. The financial system is fundamentally broken. Government should step in and control the malefactors of great wealth.

The Ecology Narrative is different. It starts with the premise that investors and borrowers cooperate and compete in a complex ecosystem. Everyone seeks wealth while minimizing risk. As Jim Manzi, a software entrepreneur who specializes in applied artificial intelligence, has noted, the chief tension in this ecosystem is between innovation and uncertainty. We could live in a safer world, but weíd have to forswear creativity. [. . .]

The Ecology Narrative is not morally satisfying. I wouldn’t bet on its popularity as a backlash against Wall Street and finance sweeps across a recession-haunted country. But the Ecology Narrative has one thing going for it. It happens to be true.

Along those same lines, this Landon Thomas/NY times story reports on how two Wall Street executives who were intimately involved in $34 billion in write-downs remain reasonably hot properties on the Wall Street employment market. The Greed Narrative apparently hasn’t caught up with those two yet, either.

But not so fast. This NY Times article reports that New York attorney general Andrew Cuomo, who replaced Eliot Spitzer as the Lord of Regulation, is currently putting the squeeze on a company that analyzed the quality of home loans for investment banks to provide evidence to prosecutors that the banks had detailed information that they did not reveal to investors about subprime mortgage risk. So, maybe that Greed Narrative still has legs after all.

But for the final word, don’t miss this Larry Ribstein post in which he exposes NY Times columnist Gretchen Morgenson’s stubborn adherence to the Greed Narrative even when it is clear from the subject of the story (in this case, the troubles of retailer Sears) that the narrative doesn’t fit.

In short, Morgenson is not one to allow the facts to get in the way of spinning a Greed Narrative morality play.

Subprime sense

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dominoes%20012508.jpgCato Institute’s Alan Reynolds passes along some interesting observations regarding his review of subprime mortgages (see previous posts here). Among them are the following:

Most current foreclosures are on prime mortgages, not subprime.
Half of subprime mortgages are fixed, not ARMs.
Most recent subprime loans were for refinancing, not buying. As appraised values on houses increased, many homeowners just borrowed on the phantom equity and spent it.
About 96% of all mortgages are paid on time. Of the remaining 4%, most are late, but not in default.
Much of the misinformation about mortgages in the mainstream media has come from the Center for Responsible Lending. That’s the outfit that received large financial backing from John Paulson, who just made $3-4 billion by shorting mortgage-backed securities during the recent panic in the subprime securities market.

Oh great!

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airline_tickets.jpgThe chronically-troubled airline industry is a common topic on this blog, as is the generally abysmal state of air travel. For good measure, this post by a former air traffic controller explains how air travel isn’t particularly safe, either.
Just what I needed to know.