Pico Iyer asks an interesting question: Why is service on U.S. airlines so bad compared with that in other U.S. industries? In particular, he asks:
“Why is it, I often wonder, that US carriers have far and away the worst ó most surly, inattentive and often snooty ó service in the world?”
Larry Ribstein figured out the answer to this enigma long ago — creative destruction.
So, Dallas Cowboys owner Jerry Jones is lobbying the Texas state legislature to intervene on the National Football League’s behalf in the league’s dispute with the cable companies over carrying the NFL Network’s slate of games. As I understand Jones’ argument, the legislators should be upset with the cable companies because they are trying to make a killing by over-charging a few of their customers who would subscribe to the network rather than simply making the network available to all customers and spreading a more reasonable amount over all of them. Or something to that effect.
Based on the numbers contained in this Mitchell Schnurman column on Jones’ new Cowboys stadium that is nearing completion in Arlington (options for top-line club seats are being offered for $50,000 each!), does anyone else find it at least a wee bit absurd that Jones is criticizing someone else for trying to make too much money?
Don’t miss the Epicurean Dealmaker’s clever — and quite accurate, in my experience — analysis of fairness opinions in the context of M&A deals.
I gave up hope long ago that the mainstream media would ever provide particularly accurate reports regarding the Enron-related criminal prosecutions.
However, the mainstream media news reports on the plea bargain hearing earlier this week in the Enron-related NatWest Three case (see NY Times, WSJ, Chronicle) are particularly devoid of any meaningful perspective of what really happened in the case (a copy of one of the plea agreements, which is the same as the other two, is here).
The real story of the plea bargain can easily be distilled from the pleadings that are on file in the case. It’s a substantially more nuanced story than what you are hearing from the mainstream media.
The prosecution in the NatWest Three case alleged that the three bankers defrauded NatWest, their former employer, by conspiring with former Enron CFO Andrew Fastow and his sidekick, Michael Kopper, to underpay NatWest for its interest in an entity named Swap Sub, which was an affiliate of one of Enron’s special purpose entities (LJM1) that Fastow and Kopper ran.
Swap Sub was involved in one of LJM1’s primary transactions, which was to hedge Enron’s valuable but highly volatile interest in a technology company called Rhythms NetConnections, Inc (“Rhythms”). The NatWest Three were responsible for overseeing the banking relationship between Enron and NatWest, including NatWest’s interest in Swap Sub. Another investor in Swap Sub was Credit Suisse First Boston (“CSFB”), which owned the same percentage interest in Swap Sub as NatWest.
In early 2000, Fastow and Kopper offered to buy NatWest’s interest in Swap Sub for $1 million. NatWest evaluated its interest in Swap Sub in response to the offer and concluded that its interest was worth zero. At the time, NatWest was in the process of being taken over by Royal Bank of Scotland and, thus, was amenable to disposing of the Swap Sub interest. So, NatWest agreed to accept Fastow’s $1 million offer, Fastow and Kopper created an entity called Southampton specifically to buy NatWest’s interest in Swap Sub, and the deal closed on March 17, 2000.
After NatWest had agreed to accept Fastow’s offer to buy the bank’s Swap Sub interest, Fastow offered to sell a portion of that interest to the three bankers personally for $250,000 upon Southampton’s completion of the purchase of the interest from NatWest. The NatWest Three still worked for NatWest at the time of Fastow’s offer, but they were all contemplating leaving the bank because of the impending takeover by the Royal Bank of Scotland. Inasmuch as acceptance of Fastow’s offer while they were still working for NatWest might run afoul of the bank’s conflict of interest rules, the NatWest Three took an option to acquire the Swap Sub interest rather than buy it outright.
Subsequently, one of the bankers (David Bermingham) resigned from NatWest, exercised the option in late April, 2000 and paid Southampton $250,000 for the interest. At the time that Southampton bought NatWest’s interest in Swap Sub, the NatWest Three did not disclose to NatWest that they had bought the option to acquire a portion of that interest through Southampton. That non-disclosure ultimately became an important fact in the plea bargain of the NatWest Three.
Shortly after Fastow offered to buy NatWest’s interest in Swap Sub for $1 million, Fastow and Kopper — unbeknownst to NatWest or the NatWest Three — offered CSFB $10 million for its interest in Swap Sub. CSFB, like Natwest, also evaluated its interest in Swap Sub at the time of the offer and concluded — as did NatWest — that the interest had zero value.
Inasmuch as Fastow and Kopper didn’t have $10 million to buy CSFB’s Swap Sub interest, they reached an agreement with Enron on March 22, 2000 to unwind the Enron-LJM1 hedge transaction on the Rhythms stock, the result of which was that Enron would buy a large chunk of Enron stock from Swap Sub for $30 million. Inasmuch as the unwind transaction would not close until the end of April, Fastow borrowed $10 million from Enron on March 22nd to pay CSFB for its Swap Sub interest. Neither NatWest nor the NatWest Three knew anything about these developments.
Subsequently, in late April, 2000, Fastow arranged with former Enron chief accountant Richard Causey to close the unwind transaction between LJM1 and Enron on the Rhythms stock. The transaction has since been subject of a substantial amount of scrutiny in the various investigations and litigation relating to Enron and it appears reasonably probable that Enron should not have paid a dime (much less $30 million) to LJM1 for agreeing to unwind the hedge. The best explanation that I have heard is that Fastow and Kopper pulled a fast one on Causey, who received nothing from the unwind transaction.
After receiving the $30 million in connection with the unwind transaction, Fastow used $10 million to repay the loan from Enron that he had used to pay CSFB for its interest in Swap Sub and paid the NatWest Three $7.3 million for their interest in Swap Sub. Fastow spread the balance of the money around to some of his underlings, including Enron treasurer Ben Glisan, who received about $1 million. Glisan’s failure to disclose his receipt of that $1 million eventually led to his termination in early November, 2001 as Enron’s treasurer. It also formed the basis of the criminal case against him.
Interestingly, the first time that the NatWest Three had any indication that the $7.3 million that they had received for their interest in Swap Sub may have resulted from a Fastow fraud on Enron was when they heard that Glisan had been fired in early November, 2001 over his failure to disclose his receipt of $1 million from Southampton.
As a result, the NatWest Three immediately and voluntarily reported everything to the UK Financial Services Authority (the UK equivalent of the Securities and Exchange Commission) — their involvement in the sale of NatWest’s interest in Swap Sub to Southampton, their purchase of the option from Fastow to acquire a portion of that Swap Sub interest, their non-disclosure to NatWest of the option at the time, their exercise of the option and purchase of the Swap Sub interest from Southampton, and their eventual receipt of $7.3 million for that interest.
The UK authorities passed along that information to the SEC and, the next thing you know, the NatWest Three had become the subjects of a criminal complaint filed on June 27, 2002 in Houston (that really encourages voluntary disclosure of information, now doesn’t it?). No US investigator ever contacted the NatWest Three to get their side of the story before filing the criminal complaint against them. UK criminal authorities never pursued any charges against the them.
The Enron Task Force originally alleged that the NatWest Three knew at the time they took the option to acquire a portion of NatWest’s interest in the Swap Sub that Fastow and Kopper were going to unwind the hedge on the Rhythms stock. Thus, the Task Force asserted that the NatWest Three knew that the unwind transaction would make NatWest’s interest in Swap Sub worth far more than either the zero value that NatWest placed on it at the time or the $1 million that Southampton eventually paid NatWest for it.
In that connection, the Task Force contended that the $10 million that Fastow arranged to pay CSFB for its interest in Swap Sub and the $7.3 million that the NatWest Three eventually received for their interest in Swap Sub was conclusive proof that the bankers had defrauded NatWest of the true value of its interest in Swap Sub.
Alas, the government’s theory of the case appears largely to have fallen apart over the past year and a half. NatWest and CSFB’s zero valuations of their respective interests in Swap Sub at the time Fastow offered to buy them proved to be valid and accurate. Given those valuations, the $250,000 that the NatWest Three agreed to pay at the same time to buy a portion of NatWest’s Swap Sub interest was clearly a speculative bet that placed the three bankers at considerable risk of loss of their entire investment.
Similarly, it also turns out that Fastow had a good reason to pay CSFB more for its interest in Sub Swab (i.e., $10 million rather than the $1 million paid to NatWest). At the time, CSFB was providing a myriad of other financial services on Enron-related deals for Fastow. Thus, buying the Swap Sub interest for $10 million was a convenient vehicle for Fastow to curry favor with CSFB. It did not mean that CSFB’s Swap Sub interest was worth anything close to $10 million.
Finally, considerable evidence emerged during the case that confirmed that the NatWest Three knew nothing about Fastow and Kopper’s plan to unwind the Rhythms hedge with Enron when they bought a portion of NatWest’s former interest in Swap Sub. Importantly, that lack of knowledge is consistent with the story that the NatWest Three told to UK Financial Services Authority in November, 2001 immediately after learning of Fastow’s possible fraud on Enron as a result of Glisan’s resignation.
So, after years of litigation, the NatWest Three pled guilty to a single count of wire fraud. The basis of the guilty plea is that the three bankers failed to disclose to NatWest the option that they had taken from Fastow to purchase a portion of NatWest’s interest in Swap Sub at the time that NatWest sold that interest to Southampton.
Importantly, the basis of the plea deal is not that the NatWest Three knew and didn’t tell NatWest that the value of the bank’s Swap Sub interest was going to skyrocket soon after Southampton bought it as a result of Fastow completing the unwind transaction with Enron.
Subject to court approval, the plea bargain provides that the defendants will serve 37 months in prison, that they will pay restitution of $7.3 million to the Royal Bank of Scotland (NatWest’s successor) and that the prosecution will support the defendants’ request that they be allowed to serve their prison sentence in the UK.
Under UK rules pertaining to prison sentences of white collar criminals, it is expected that the three former bankers would be released from their UK prisons after serving approximately half of their sentence.
As the Financial Times’ Martin Wolf observes here, this plea deal appears to be the product of the draconian trial penalty that the three bankers faced if they availed themselves of their right to a trial and lost. Under those circumstances, the defendants were facing possible sentences of 35 years each, although the sentences would likely have been considerably less than that. Nevertheless, the sentences after a trial probably would have been greater than 37 months and, had the NatWest Three defended themselves at trial and lost, the prosecution almost certainly would never have agreed to support a request to serve their prison sentences in the UK.
Thus, on one hand, the defendants could risk a trial in a virulent anti-Enron environment that could result in a long prison sentence that would have to be served in the US prison system thousands of miles away from their families. Or, on the other hand, they could enter into a plea deal that gives them the hope of being able to serve a considerable amount of a much shorter and definite sentence in the UK prison system near their families.
Given those choices, my sense is that the NatWest Three’s choice was a rational and reasonable decision.
It’s simply not a choice that they should have been forced to make.
The Chronicle’s Mary Flood reports Shell Oil Co. general counsel has directed attorneys at law firms who do work for his company not to drive and talk on their cell phones while doing Shell business.
I wonder if this means that Shell will also direct its outside counsel not to talk to people riding with them in their car while doing Shell business?
Don’t miss this Christof Spieler post in which he identifies the real issue that needs to be addressed in regard to the controversial Ashby high-rise condominium project — the issue of the project’s scale in relation to the rest of the neighborhood. Thus, enacting a “hurry-up” city ordinance addressing a not-as-important issue (i.e., alleged traffic congestion) is a prescription for making poor public policy. Solid analysis. (H/T Charles Kuffner).
As economists such as Nouriel Roubini increasingly predict a recession and a hard landing for the U.S. economy, Merle Hazard channels Merle Haggard, Arthur Laffer, Milton Friedman, Mac Davis, Ben Bernanke and Elvis — to name just a few — in expressing Wall Street’s current trepidation. It doesn’t get any better than “In the Hamptons” (H/T to the NY Times via Larry Ribstein):
Michael Lewis (previous posts here) — author of Moneyball and The Blind Side: Evolution of a Game (previous post here) — pens this NY Times op-ed in which he addresses a frequent topic on this blog — that is, the shameful economic exploitation of athletes by many universities in the business of big-time college football (see previous posts here, here and here):
College footballís best trick play is its pretense that it has nothing to do with money, that itís simply an extension of the universityís mission to educate its students. Were the public to view college football as mainly a business, it might start asking questions. For instance: why are these enterprises that have nothing to do with education and everything to do with profits exempt from paying taxes? Or why donít they pay their employees?
This is maybe the oddest aspect of the college football business. Everyone associated with it is getting rich except the people whose labor creates the value. At this moment there are thousands of big-time college football players, many of whom are black and poor. They perform for the intense pleasure of millions of rabid college football fans, many of whom are rich and white. The worldís most enthusiastic racially integrated marketplace is waiting to happen. [. . .]
If the N.C.A.A. genuinely wanted to take the money out of college football itíd make the tickets free and broadcast the games on public television and set limits on how much universities could pay head coaches. But the N.C.A.A. confines its anti-market strictures to the players ó and God help the interior lineman who is caught breaking them. Each year some player who grew up with nothing is tempted by a boosterís offer of a car, or some cash, and is never heard from again. [. . .]
Last year the average N.F.L. team had revenue of about $200 million and ran payrolls of roughly $130 million: 60 percent to 70 percent of a teamís revenues, therefore, go directly to the players. Thereís no reason those numbers would be any lower on a college football team ó and thereís some reason to think theyíd be higher. Itís easy to imagine the Universities of Alabama ($44 million in revenue), Michigan ($50 million), Georgia ($59 million) and many others paying the players even more than they take in directly from their football operations, just to keep school spirit flowing. (Go Dawgs!)
But letís keep it conservative. In 2005, the 121 Division 1-A football teams generated $1.8 billion for their colleges. If the colleges paid out 65 percent of their revenues to the players, the annual college football payroll would come to $1.17 billion. A college football team has 85 scholarship players while an N.F.L. roster has only 53, and so the money might be distributed a bit differently. [. . .]
A star quarterback, . . . might command as much as 8 percent of his college teamís revenues. For instance, in 2005 the Texas Longhorns would have paid Vince Young roughly $5 million for the season. In quarterbacking the Longhorns free of charge, Young, in effect, was making a donation to the university of $5 million a year ó and also, by putting his health on the line, taking a huge career risk.
Perhaps he would have made this great gift on his own. The point is that Vince Young, as the creator of the economic value, should have had the power to choose what to do with it. Once the market is up and running players who want to go to enjoy the pure amateur experience can continue to play for free.
Read the entire piece.
One of the fringe benefits of the turmoil at Merrill Lynch and Citigroup last week is that Austin-based Dell Inc quietly filed five 10-Qs, a proxy statement and last yearís 10-K (see this previous post about Dell’s delinquent filings). The filings contain restated financial information stretching from 2003 to the first fiscal quarter of 2007 and brings Dell into compliance with Nasdeq rules regarding filing of periodic financial reporting. Jack Ciesielski in this AAO Blog post does the heavy lifting in analyzing Dell’s filings.
Houston Mayor Bill White is capriciously manipulating local governmental power to sidetrack development of a condominium project (nicknamed the “Ashby high-rise”) in a neighborhood where he raises a substantial political campaign funds. The incident has received some national attention through this Wall Street Journal ($) article, which somehow suggests that Houston’s phenomenal growth over the past 50 years has been in spite of — rather than because of — the city’s lack of zoning and liberal land use policies.
At any rate, it’s really a sad reflection of the state of political discourse in Houston that the Mayor has been given a pass on undermining a project for the benefit of his campaign war chest. The property was valued and sold to the present owners on the assumption that a large-scale redevelopment would be built there and the owners followed all the city’s rules and regulations in obtaining the necessary permits to proceed with construction. When a few wealthy neighbors of the development pulled Mayor White’s chain, he blithely ordered one of the city’s approvals to be revised to delay the development and now is attempting to ramrod two ordinances through city council to stop the project altogether.
In short, the developers invested a substantial amount of money in buying the property and followed the laws in preparing the large-scale redevelopment, dozens of which dot Houston’s landscape. Mayor White and his friends don’t like the development, so White is changing the laws. And this is political leadership?
At any rate, all of this reminded me of this excellent Virginia Postrel/Atlantic.com article that compares the radically different land use policies of Los Angeles, on one hand, and Dallas (which are quite similar to Houston’s), on the other. Suffice it to say that the likes of Mayor White favor the Los Angeles approach over that of Dallas and Houston. Think about that the next time you vote for mayor.
Update: The website for the group opposing the project is here. A copy of the proposed “emergency” ordinance is here.
Update 2: A recent West U Examiner article on the project is here.