After years of remaining neutral on the Wright Amendment — that law that restricts flights from Dallas’s Love Field Airport — Southwest Airlines is now calling the rule “anticompetitive” and “outdated”.
It’s about time.
The Wright Amendment was enacted in 1979 to facilitate the success of the then new Dallas-Fort Worth International Airport, which was built in a rural area in the northern part of the Metroplex between Dallas and Ft. Worth. Dallas’ other airport — Love Field — enjoys a near-downtown location. In order to funnel air traffic to DFW, the Wright Amendment banned interstate service from Love Field on jets with more than 56 seats to all but seven states near Texas.
When DFW was built, Southwest did not want to move to DFW and has never had any service at the bigger airport. DFW is the dominant hub of AMR Corp.’s American Airlines, which has enjoyed the respite from competitive pressures that the Wright Amendment provides. That anti-competitive effect has been part of the reason why American has been slow to adapt to the rapidly changing airline industry, in which discount carriers such as Southwest have brought an era of lower fares and additional seats. The “legacy airlines” such as American, Delta, and United are reeling as a result.
The Wright Amendment — which was questionable policy at best at the time it was enacted — is clearly obsolescent. The area around DFW is no longer rural and the airport is now literally in the center of the northern part of the Metroplex. Moreover, Southwest is now a national airline, and it is inhibited from servicing that national network of flights from its hub at Love Field.
At DFW, Delta Air Lines recently announced that it is abandoning its unprofitable hub, which is cutting 250-plus daily flights to about 45. Although that move will increase American’s dominance at DFW in the short run, industry observers expect some of the discount carriers to make a play for some or all of Delta’s old gates at DFW.
Nevertheless, Southwest contends that it is going to remain at Love Field despite the galling Wright Amendment restriction on long haul flights from that airport. But Southwest is using Delta’s exit as proof that DFW does not need the Wright Amendment’s protection anymore. Southwest notes that many cities — including New York, Chicago, Houston, and Los Angeles — enjoy the benefits of two airports without any need of the “protections” afforded to DFW by the Wright Amendment.
As you would expect, American Airlines disagrees. In a statement issued Friday, American stated that the Wright Amendment is just as relevant today as it was when it first passed and helps preserve DFW’s position as the principle aviation gateway for North Texas.
Folks, that type of thinking is a big part of the reason why American Airlines is in the poor financial shape that it currently finds itself, particulary in comparison to that of Southwest. It will be interesting to watch the politicians line up in regard to this particular issue. The issue will be a good barometer for determining whether a particular politician is attempting to protect the public’s best interests or simply interested in keeping the money flowing into a campaign chest from legacy airlines such as American. Stay tuned.

An interesting fight is brewing in Austin over investment policy for public funds in Texas.
Venture capitalists are opposing Greg Abbott, the Texas Attorney General, in regard to his opinion that they must publicly disclose information about their investments on behalf of public institutions.
Austin Ventures, a prominent Texas venture firm, has threatened to end its relationship with two limited partners — the Teacher Retirement System of Texas and University of Texas Management Corp. (Utimco) — if they do not join a lawsuit that is contesting the attorney general’s opinion that would require release of fund-performance data and other information about venture-backed companies.
The dispute stems from requests filed under state open-records laws by several newspapers seeking information about private-equity investments by the teacher-retirement fund and the Texas Growth Fund, which is a state-run investment trust. The funds denied the requests, and asked Attorney General Abbott to back them up. The funds argued that the information was confidential under the terms of their partnership agreements and that releasing the proprietary information could put venture-backed companies and their investors at a competitive disadvantage.
Nevertheless, in a June, 2004 opinion, Mr. Abbott said the funds had failed to show how releasing the information “would bring about specific harm to their marketplace interests.” In a subsequent letter to Utimco and the teachers’ fund, Austin Ventures said that the disclosures could “sabotage under-performing companies” and force start-ups to raise additional capital on unattractive terms. Moreover, Austin Ventures claimed that entrepreneurs would spurn investments from Austin Ventures or any other VC fund that could not maintain the privacy of their confidential information.
Sequoia Capital, one of Silicon Valley’s top venture-capital firms, last year terminated two longstanding investors — the universities of Michigan and California — from its latest fund because it did not want information about the performance of its closely held investments to be disclosed under those states open-records laws. The Texas case potentially has bigger stakes because the information that would be disclosed includes data about the performance of individual portfolio companies and the value that venture backers place on them.
Texas Growth Fund filed the Texas case in state court and requests that the court overturn the attorney general’s opinion. The teachers’ retirement fund joined the suit after receiving the August letter from Austin Ventures. Utimco, which already releases performance data for the fund but not for its underlying investments, wrote to the attorney general objecting to his ruling, but has not decided whether to join the suit.
As of May 31, Utimco had $76 million committed to Austin Ventures, less than 1% of its $16.2 billion portfolio. On the other hand, Austin Ventures has $2.4 billion under management, so the Utimco investment is a larger percentage of that portfolio, but still not a substantial portion of it. TRS currently has committed $55.3 million of its $84.4 billion endowment to Austin Ventures. Consequently, we are talking about very small parts of the public funds’ portfolios here.
Quare: Should trustees and investment management of Texas public and quasi-public funds be restricted from diversifying the investment portfolio of such funds by legislation that effectively denies such funds from investing in potentially profitable venture capital funds that limit information about their investments? If so, why should public funds be restricted from investing an appropriate amount of their portfolios in potentially the most profitable investments?

These prior posts have been following Jerry Jones‘ efforts throughout this year to obtain lucrative public financing for a new stadium in the Dallas area, which resulted in Arlington voters approving a financing deal for Jones and the Cowboys this past eletion day.
Economist Craig Depken has done a good job of criticizing the dubious economic arguments in favor of the stadium deal, and has compiled a good list of articles regarding the pros and cons of the transaction. Professor Sauer over at the Sports Economist has also chimed in often on the questionable basis of claimed economic benefits derived from public financing of such stadium deals.
Nevertheless, despite the evidence of relatively nominal economic value, publicly-financed stadium deals continue to be popular. Noting this, economists Jerry Carlino and Ed Coulson claim in this recent paper that opponents of such stadium deals have tended to underestimate the intangible value that people derive from their sports teams:

We found that once quality of life benefits are included in the calculus, the seemingly large public expenditure on new stadiums appears to be a good investment for cities and their residents.

The authors go on to compare an NFL team to an old-growth forest for a city, which is another way of saying that the stadium is something that people enjoy even if they never visit it. In addition, citizens enjoy a certain amount of civic comraderie that results from supporting and discussing the team.
I will leave a review of the authors’ methodology to those more qualified than I in such matters, but my sense is that reasoned opponents of publicly-financed stadium deals will not really quibble much with the conclusions contained in this paper. Rather, most economists who oppose publicly-financed stadium deals do so because of the way such deals are pitched, not because they are necessarily critical of the public’s love of their professional sports team.
If proponents of a stadium deal admitted in campaigning for the deal that the economic benefits of the deal were questionable, but that the intangible benefits to the community overrode the financial risk of the deal, then most reasoned opponents of such deals would be satisfied. They might not be persuaded to support the deal on that basis, but at least they would have the comfort that voter assessment of the deal would be based upon an honest presentation of the issues. As it stands now, the presentation of the economic issues in most stadium campaigns is muddled by well-financed and highly questionable assertions of direct economic benefits derived from such deals.
In short, let’s just have truth in advertising in regard to such deals.
Meanwhile, Daniel Akst over at Marginal Revolution also makes an interesting observation about the intangible value of a sports team in relation to the size of a city:

. . . my guess is that the intangible value of an NFL team would be inversely proportionate to the importance of a city. You can’t take the Packers out of Green Bay, but Los Angeles doesn’t seem to mind having no team at all. Then again, maybe it’s just the weather.

Update: Professor Sauer’s typically insightful post is here on the Carlino and Coulson piece, with cites to other resources on the issues relating to public financing of stadiums.

Holman W. Jenkins’ WSJ ($) Business World column this week explores how the miplaced incentives of America’s health care finance system contributed to Merck over-marketing — and doctors over-prescribing — Vioxx despite its well known side-effects:

[Vioxx was never supposed to be] a better pain reliever. Its unique selling proposition was simply a lower incidence of stomach bleeding, a real benefit but one mainly relevant to the 15% of arthritis sufferers who can’t safely take conventional pain relievers.
Merck pulled the drug two weeks ago based on a study showing that, after 18 months of daily use, Vioxx subjects began experiencing heart attacks and strokes at twice the rate of a placebo group. Yet, on balance, this might have seemed mildly less alarming than the 2000 study that kicked off the Vioxx controversy. Also done by Merck, it showed that Vioxx users, from day one, suffered two or three times as many cardiovascular “events” as a control group using naproxen (the ingredient in Aleve).
. . . [But] Merck is in hot water now not because Vioxx was excessively risky but because the wrong people were taking it — a problem for which doctors and the insurance system are also to blame.
. . . Marketing alone doesn’t cause patients to shell out $2 for a pill that doesn’t work any better than a five-cent aspirin. Bruce Stuart of the University of Maryland has showed that the biggest determinant of whether a patient takes a Cox-2 or a cheaper drug is whether an insurance company is paying.
Likewise, we’ve heard two schools of complaint from patients since Vioxx was yanked. Some patients are irate at Merck for depriving them of a drug they found genuinely useful, but others are mainly irate at their doctors for never mentioning that Advil or Tylenol work just as well.
The Vioxx debacle is symptomatic of a system that shields consumers from price signals and sometimes actually discourages them from making the right health-care choices. Forget pain relievers. In certain common breast cancers, women opt for expensive, risky, miserable chemotherapy even though it doesn’t significantly improve an already high survival rate. They have a hard time waving it off, though, precisely because an insurer is picking up the tab.
In any case, Big Pharma is well along in being corrupted by third-party payership, just like the rest of the health-care industry. Drug makers increasingly aim their development efforts at the aches, pains, insecurities, heartburn and erectile dysfunction of price-insensitive, over-insured baby boomers because that’s where the money is.

Read the entire piece.

A JPMorgan Chase & Co. subsidiary is paying almost a billion dollars to buy a piece of some of the state’s biggest buildings, including three in Dallas and two in Houston.
Ft. Worth-based Crescent Real Estate Equities Co. announced Monday that it is selling a stake to JPMorgan Investment Management in the Trammell Crow Center, Fountain Place and Crescent buildings in Dallas, and the Houston Center and Post Oak Central projects in Houston. Together, the properties have 7.9 million square feet of office space.
JPMorgan will buy a 60 percent stake in the Crescent in Dallas and the Houston Center and Post Oak Central projects in Houston. Those buildings are valued at almost $900 million. JPMorgan is also buying a 76 percent share of the Trammell Crow Center and Fountain Place skyscrapers in downtown Dallas, which are valued at about $320 million. Crescent said it will generate about $316 million in cash from the sales, and disclosed that it is negotiating with another buyer to reduce its ownership in the Crescent and the two Houston properties further to 24 percent. Upon completion of the sales, Crescent will be the general partner in the ventures and will continue to manage and lease the buildings.
Crescent endeared itself to many in Houston real estate business circles several years ago for managing to put itself in the position of prosecuting a highly publicized and unpopular lawsuit against Houston-based Lakewood Church. As the owner of Greenway Plaza, Crescent objected to the church’s leasing from the City of Houston of the Houston Rockets’ former home, The Summit a/k/a Compaq Center in Greenway Plaza, which the church is turning into a mega-church facility. Crescent and the City eventually worked out a settlement, and Crescent dropped the lawsuit against Lakewood, exiting the litigation with its tail squarely between its legs.

The National Football League has demonstrated again that it is the most valuable reality-based programming in the television industry today.
The NFL announced on Monday that Viacom Inc.’s CBS, News Corp.’s Fox, and satellite broadcaster DirecTV Group Inc. agreed to pay the incredible total of $11.5 billion to retain television rights to NFL games for the remainder of this decade. The deals represent an overall 40% increase compared with current contracts and reflect that professional football remains America’s most popular sports league despite the overall decline of broadcast-TV viewership.
The two broadcast networks will pay $8 billion combined over six years, through the 2011 season. Fox’s payments under its $4.3 billion pact will average $712.5 million annually, a 30% increase over the current deal’s $550 million average. CBS’s $3.7 billion deal averages out to $622.5 million a year, up 25% over its current $500 million average. Each network will air two Super Bowls under the new contract.
Moreover, the satellite-TV deal was a key to the renewals. DirecTV, which News Corp. controls, will pay the NFL $3.5 billion over five years through 2010 ($700 million a year), which is a substantial increase from the $400 million a year it pays now. The “NFL Sunday Ticket” package gives subscribers access to as many as 14 games a week.
The NFL’s current deals with Fox, CBS and Walt Disney Co.’s ABC and ESPN expire after the 2005 season. The league hasn’t announced extensions with ABC, which airs “Monday Night Football,” or ESPN, which shows a game on Sunday nights. ABC and ESPN have declined to negotiate new contracts until after the season ends.
The increase for the Sunday afternoon games on CBS and Fox is less than the the 72% increase that the NFL received under the most recent renewal of the contracts in 1998. However, in the current television market, the increase is considered remarkable. Although ratings for regular-season NFL games declined 10% overall from 1999 through 2003, this decline occurred against much sharper ratings declines for other television programming. And despite that decline, the Super Bowl remains the most-watched TV show of almost any year.
In fact, the two networks are paying more money for a potentially less desirable game inventory. CBS and Fox agreed to let the NFL sell a package or packages of as many as eight games a season for Thursday and Saturday nights and to cherry-pick late-season games to showcase on “Monday Night Football.”
CBS and Fox renewed their deals despite what most analysts describe as enormous losses on current contracts. ABC’s “Monday Night Football” has been estimated to post losses of as much as $250 million a year, and Fox wrote off $397 million from its current $4.4 billion deal in 2002. Viacom executives contend that CBS has not lost money on their deal with the NFL.

Houston-based Dynegy Inc. has entered into an agreement to purchase from Exelon Corp. all of the outstanding shares of ExRes SHC Inc. Through the acquisition, Dynegy will acquire a 1,042-megawatt, 7,211-Btu heat rate, combined-cycle independence power generation facility near Scriba, N.Y., four natural gas-fired merchant facilities in New York, and four hydroelectric generation facilities in Pennsylvania.
As a part of the deal, Dynegy will also acquire controlling interest in a 750-megawatt firm capacity sales agreement with Con Edison, a subsidiary of Consolidated Edison Inc. The sales agreement, which runs through 2014, provides annual cash receipts to Dynegy of about $100 million. The financial terms of the agreement include the payment by Dynegy of $135 million and the consolidation of $919 million in project debt, and Dynegy projects that the principal and interest payments related to the consolidated debt will be substantially funded through 2014 by the proceeds from the long-term capacity sales contract with Con Edison.
The deal is the first major purchase that Dynegy has made since it underwent a massive restructuring in 2002. That restructuring was prompted by the crisis in the energy trading industry that followed industry leader Enron‘s spiral into bankruptcy in late 2001.

Readers of this blog know that I am critical of several recent “popular” prosecutions of business executives, and this NY Times article reports on the opinions of several experts who agree with my view:

“It is exaggerated to say that there is much more corporate malfeasance than in the past,” said Luigi Zingales, a professor of economics at the University of Chicago. “Malfeasance is just more likely to be revealed in recessions.”

“Prosecutors are going after white-collar crime with an eagerness we hadn’t seen before,” said James D. Cox, a professor of law at Duke University. “The state attorneys general realized that the governor-in-waiting, otherwise known as the attorney general, can get a lot of headlines.”

“In a bubble, people want to be lied to,” said John C. Coffee Jr., a professor at Columbia Law School. “It was more than a conflict of interest – securities analysts boosted stocks because people wanted them to.”

The article concludes by noting that the investing public’s attitudes often changes with which way the investing winds are blowing, and that such changes have an effect on the resulting prosecutions of business executives:

[W]hen the market went south, . . . faith in self-regulation took a beating, and new regulations like the Sarbanes-Oxley rules for corporate governance were passed. Suddenly less prosperous, Americans became much more willing to catch and punish abuses, and admiration for high fliers turned to suspicion.
“The social dynamics are sometimes more important than the law,” Mr. Coffee said.

And we should all be concerned about that. For when we allow the law to be twisted to appeal to the “social dynamics” of a particular situtation, then the law becomes just another convenient political tool and the rule of law erodes.
And for those who would respond — “So what? What’s the problem with eroding the rule of law a bit to nail some greedy business executives?” — I would remind them of Thomas More’s advice to his son-in-law-to-be Will Roper from A Man for All Seasons:

“Oh? And when the last law was down, and the Devil turned ’round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man’s laws, not God’s! And if you cut them down — and you’re just the man to do it, Roper! — do you really think you could stand upright in the winds that would blow then?”
“Yes, I’d give the Devil the benefit of law, for my own safety’s sake!”

Jonathan Clements has written The Wall Street Journal’s ($) Getting Going personal finance column since October 1994. In this week’s column, he reflects on ten years of providing personal finance advice, and his views are quite interesting and somewhat surprising for a columnist of a newspaper that advocates investment:

The fact is, over the decade I have written this column, my optimism has taken a beating. Yes, I still believe it is possible for ordinary investors to make decent money on Wall Street. But it has become increasingly clear to me that the odds are stacked against us.

First, Mr. Clements notes that gains in stock prices are almost certainly going to slow over the next several decades:

[T]he collapse in stock prices has made me look harder at historic market returns — and I don’t like what I see. According to Chicago’s Ibbotson Associates, the Standard & Poor’s 500-stock index has clocked an impressive 10.4% a year since 1925.
A significant part of that gain, however, came from both rich dividend yields and rising price/earnings multiples. Today, with dividend yields so low and P/E ratios so high, long-run returns will almost certainly be lower — even assuming robust economic growth.
The nosebleed valuations are especially worrisome given the aging of the U.S., Europe and Japan. In 30 years, 20% of the U.S. population will be age 65 or older, up from 12% today. With fewer workers per retiree and massive government spending needed for Social Security and Medicare, we are going to face some grim financial choices.
Thanks to their younger population, developing nations should post faster economic growth. That is why I am a big fan of emerging-market stock funds. . . These funds, however, aren’t a sure thing, in part because the countries involved don’t offer the political stability and commitment to property rights that we enjoy in the U.S.

Indeed, when the costs attributable to investing are assessed, the potential gains look even slimmer:

If the markets’ raw results are a tad slim in the decades ahead, the gains may all but disappear after figuring in investment costs, taxes and inflation.
Suppose you own a balanced portfolio of stocks and bonds that scores 6% a year. Knock off two percentage points for investment costs, and you will be down to 4%. Lose 25% to taxes, and that 4% will become 3%. Wouldn’t mind earning 3%? Problem is, that 3% could easily be devoured by inflation, leaving you with no real return.
Faced with such potentially meager results, the solutions are obvious enough, and I find myself advocating them ever more stridently. Want to make your investment portfolio grow? You need to save like crazy, make the most of tax-sheltered retirement accounts, trade sparingly and favor low-expense funds, especially market-tracking index funds.

After ten years of reviewing the travails of the individual investor, Mr. Clements is no fan of the Bush Administration’s proposal to privatize Social Security:

Unfortunately, during the past decade, my confidence in the investment acumen of ordinary investors has been shaken. I have come across too many serial blunderers, folks who jumped from technology stocks in the late 1990s, to bonds in the bear market, to real-estate investment trusts in 2004, always buying after the big money has already been made.
These investors have neither the education nor the emotional fortitude to invest sensibly. That is one of the reasons I believe replacing traditional company pension plans with 401(k) plans has been a mistake. Similarly, I fear that the privatization of Social Security will be a disaster unless it is accompanied by a slew of safeguards.

And perhaps most surprisingly, Mr. Clements levels his harshest criticism for the industry that makes its living off of advising people on how to invest:

Of course, wayward investors could be straightened out with sound investment advice. But that isn’t exactly a safe bet.
Over the years, I have met some fine brokers and financial planners. I have also, however, heard too many horror stories. As e-mail has spread, journalists have become more accessible to readers — and that means I get a steady stream of e-mails from aggrieved investors who were taken to the cleaners by unscrupulous advisers.
To make matters worse, Wall Street appears to have scant interest in fixing this mess. In theory, we should be entering a golden age of investment advice, with brokers and planners helping legions of aging baby boomers to manage their burgeoning nest eggs.
Yet rather than helping investors, Wall Street seems more intent on profiting from them. Brokerage firms could refuse to sell bad investment products and ruthlessly weed out rotten brokers. Instead, they appear content to let their brokers loose on the unsuspecting public. What about the legal problems that inevitably follow? That, it seems, is viewed as simply the price of doing business.

Read the entire column.

Reports the Washington Post.