Monthly Archives: August 2004

SEC steps up investigation into business dealings with Equatorial Guinea

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Following on previous posts here and here regarding the rather wild business of exploring for oil and gas in the African nation of Equatorial Guinea, Devon Energy Corp. announced that it had received a letter Friday from the Securities and Exchange Commission asking for cooperation in an inquiry into whether U.S. oil companies violated federal law by bribing officials in Equatorial Guinea.
Other U.S. companies that have been contacted include Exxon Mobil Corp., Marathon Oil Corp., ChevronTexaco Corp. and Amerada Hess Corp. The inquiry follows a U.S. Senate subcommittee report last month into Washington-based bank Riggs National Corp.
The Senate report concluded that several companies had made millions of dollars in dubious payments to top officials in the West African nation through the bank. Devon and the other companies have also denied violating the law and said they would cooperate with the commission inquiry.
According to the Senate report, Devon made payments totaling $350,000 to Equatorial Guinea officials, reportedly to meet “educational training obligations” required under production sharing contracts. Devon also announced that it had begun an internal investigation into the matter.

The politics of academia addresses a knotty Enron issue

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It’s always interesting to watch the machinations that occur whenever academics must address a conflict between their academic principles and the devilish necessity of money.
This Houston Chronicle story picks up on this earlier article concerning the University of Missouri-Columbia‘s dilemma regarding what they should with a substantial endowment donated by former Enron Corp. Chairman and CEO Kenneth Lay if Mr. Lay is convicted of securities fraud in his pending Enron-related criminal case.
In one of the understatements of the year to date, UM officials say they would “prefer” to remove Mr. Lay’s name from a yet unfilled economics professorship he endowed if he is convicted. However, under the terms of the donation contract, such a move would require the return of Mr. Lay’s 1999 donation of $1.1 million to the school. The professorship remains unfilled to date.
Talk about a tough decision. This one is getting the attention of the highest levels of the UM administration.
In an e-mail obtained by the Columbia Daily Tribune, UM Chancellor Richard Wallace told UM President Elson Floyd and the university’s Board of Curators about discussions he and Provost Brady Deaton had about the Lay chair in economics:

“Unless Mr. Lay is convicted of a felony, the money in the endowment should be retained and used for the purpose for which it was established,” Wallace wrote. “If found guilty then we would prefer to remove the name from the chair and, in accord with the terms of the endowment, we believe that this would require returning the money to Mr. Lay.”

And we thought the periodic scandals in UM’s basketball program caused difficult issues!
From my vantage point, the UM administration is engaging in muddled thinking here. Regardless of the outcome of Mr. Lay’s criminal case, it is reasonably clear that Mr. Lay was at least negligent to some extent in connection with the collapse of a major American corporation that cost investors and creditors billions and that he led a company that now has become synonymous in American society (or at least on Letterman and Leno) with corrupt business practices. Whatever the outcome of Mr. Lay’s criminal trial, that is not going to change. Consequently, using the outcome of the criminal trial as the standard on whether to keep the money seems to be a misplaced standard to use under these circumstances.
If UM decided that it should not keep the donation, I really could not quibble with such a decision. Frankly, there would probably be some public relations benefit to the University in doing so. However, it seems to me that this dilemma also provides an opportunity for a bit of academic administration creativity.
I propose that UM go ahead and fill the chair with Mr. Lay’s name on it and use it to promote academic research into risk analysis in economics and business. Enron was a staggering investment loss, but the risk of such a loss and related insolvency is arguably the most important assessment that is made in any investment decision. Although Mr. Lay’s legacy in business is certainly different from what UM thought it would be in 1999 when it accepted his donation, that legacy nevertheless reflects one key aspect of business and economics. Why not use Mr. Lay’s donation and the unfortunate circumstances of Enron’s demise to promote research into issues relating to the risk of loss and insolvency?

The ongoing cost of public financing of sports stadiums

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In an effort to persuade Moody’s investment rating agency from downgrading its bonds to junk status, the Harris County Sports Authority voted to issue $37.2 million in new bonds this week to cover the ongoing cost financing the building of Minute Maid Park, Reliant Stadium and Toyota Center in Houston over the past five years. The three sporting venues cost $1.036 billion to build — Reliant Stadium cost $500 million, Minute Maid Park, $286 million, and Toyota Center, $250 million. With the bond issuance, the price tag has now risen to $1.073 billion.
I have always been fascinated with this type of reasoning regarding investment: “In order not to allow the interest rate on our existing highly-leveraged bonds to rise, let’s go ahead and issue some more highly-leveraged bonds.” H’mm.
At any rate, the new bonds were needed to make up for declining hotel and car rental tax revenues, which services bond debt. In 2002 and 2003, the revenues sagged by approximately 10 percent. To meet the annual payments for $900 million in previously issued bonds, the authority had projected annual 3 percent increases in hotel and car rental tax revenues. During the past two years, the tax revenue generated by the special taxes has declined about 5 percent each year, which means that the sports authority missed its projections by close to 8 percentage points during each year.
The Sports Authority was facing penalties if it failed to fulfill its agreement to replenish its cash reserve fund from $32 million to $47 million by May 2006. With hotel and car rental taxes declining, the Authority was not going to be able to raise the money unless it issued the bonds. About $15 million of funds generated from the new bonds will be added to the cash reserve fund.
Paul Bettencourt, Harris County tax assessor-collector, was skeptical about the public financing of the stadiums at the time that each was approved. “It’s just three, four, five years after the elections, and already they’re selling more bonds,” he said. “This is a big concern to me, and it should be to taxpayers.”
I am hopeful that that Professor Sauer, who comments regularly on the follies of public financing of sports stadiums, will have his usual keen observations on this development.

Everett hurt in Stros win

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Stros shortstop Adam Everett suffered a broken bone in his left wrist as the Stros beat the Expos 4-0 Friday night behind Roy O’s nifty five-hitter.
Everett was hit by a pitch from Claudio Vargas in the fourth inning that broke the ulnar bone. He will be sidelined for at least a month and, if he needs surgery, will be lost for the rest of season.
After having -13 RCAA/.700 OPS in 2003 (RCAA explained here), his first year as a starter, Everett is off to a .385 SLG, .317 OBA, .703 OPS, -13 RCAA start in his first 102 games. He has a .681 career OPS, compared to his league average of .774, and -34 RCAA in 279 games.
Consequently, although you will hear wailing from the Stros management and the mainstream media about what a huge loss Everett is to the club, the reality is much less dramatic. Everett is an above-average fielder and a below average fielder whose production can be replaced rather easily. Indeed, even though Viz does not field as well as Everett, he has hit much better than Everett this season, so playing him instead of Everett is about a wash in the big scheme of things.
Oswalt (12-8) struck out eight and walked one in hurling his second shutout of the season and the third of his career. Oswalt has now won four straight decisions overall and improved to a rather incredible 9-0 against the Expos in 13 career starts. Oswalt’s complete game was a timely tonic for the Stros’ bullpen, which sorely needed some rest after virtually every relief pitcher in sight was used during yesterday’s game against the Braves.
Bags and JK drove in two runs each for Houston, and Bags hit a solo homer in the second inning that tied him with Frank Thomas for 30th on the career home run list at 436. Lance Berkman made it a short night for Expos starter Rocky Biddle by nailing him with a vicious line drive that careened all the way back across the first-base line. Biddle left the game with a bruised ankle and relatively good fortune that his injury was not much worse. In other statistical news, Bidg was hit by a pitch for the 13th time this season and raised his career total to 255, the most by far among active National League players.
Andy Pettitte tries to coax a few innings out of his sore left elbow in the Saturday game of the series, and the Stros are preparing for a big crowd on Sunday as the Rocket goes for win number 13.

Excellent 2004 Election website

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I have been meaning to pass along the Electoral Vote Predictor 2004, which has one of the best interfaces that I have seen in analyzing the upcoming Presidential election. Check it out.

Houston’s charms

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Charles Kuffner over at Off the Kuff points us to an interesting website that allows people to write and read what they enjoy about Houston. Check it out.
My favorite: “Ridiculous to sublime. Rothko to Airline.”

More on tax simplification

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Bob Formaini is a Senior Economist and Public Policy Advisor at the Federal Reserve Bank of Dallas. In this TCS Central column, Mr. Formaini addresses a fundamental absurdity of the income tax system in the United States:

You might be wondering why, this year, my return has become something that, as I gaze on its small novel length, reads as if it were written in some foreign language. It’s simple. My wife and I are dealing with the death of her mom and an inheritance that involves two trusts, dozens of stocks, and three limited partnerships. I can understand the W2s okay. But the heart of my return is completely alien to me. I have no idea what it says or whether it is accurate. We have placed our fate in the hands of a very competent tax accountant, but even though his name is on the return along with ours, I remain somewhat uneasy signing a document that I can’t understand.

Then, Mr. Formaini addresses the real heart of the matter:

There is something wrong with a tax code that requires so much paperwork, so many hours of preparation, so much frustration with the endless record keeping that the law demands. And that’s just for individuals. The burdens on business are staggering. Even so, our return no doubt is, for our accountant, a baby sort of thing. I doubt that he even worked up a mild sweat. Compared with the returns he does for a living — a living created by Congress and their inability to have a simple tax code and for which I certainly do not begrudge him — our return is probably a laugher. And yet, to a guy like me with four college degrees including a PhD, it might as well be written in Klingonese. I have become, along with most of my fellow citizens, just another helpless dunce who can’t deal with the complexities that our wonderful politicians yearly serve up.

Which leads Mr. Formaini to a very provocative thought regarding this ludricrous situation that we have allowed our leaders to place us in:

The upside, assuming there is one, of being a helpless dunce is that one can no longer be held responsible. Unless Congress, “simplifying the tax laws” once more, decides that the old legal doctrine of mens rea is no longer the standard for criminal behavior. If that happens, were all potentially in some very serious trouble.

Amen.

Braves down Stros

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The Stros ran out of relief pitchers as the Braves came back from a four run deficit to win the rubber game of the clubs? series, 6-5 at the Juice Box on Thursday evening.
Stros’ starter Darren Oliver was the latest Stro pitcher to get a hitch in this giddyup as he left after an inning with the seemingly ubiquitous ?stiff shoulder.? That prompted a parade of Stro relief pitchers, who actually pitched reasonably well with the exception of Gallo, who looked like he was throwing grapefruit to the appreciative Braves hitters. After Gallo gave up two runs and put another runner aboard, Weathers relieved him, Marrero cranked the longest yak he will ever hit on the first pitch, and Presto! The Braves had comeback from a 5-1 deficit and all Stros? fans had that old ?Uh, oh, here come the Braves? feeling again. The Braves pushed a run across in the top of the ninth against Miceli to nab the win.
Although the Stros scored five runs ? a monstrous total for them against the Braves ? most of the production was courtesy of the Braves ? they walked nine Stros? hitters. The Stros had just two extra base hits, including Beltran?s solo yak, and after the fifth inning when the Stros staked their 5-1 lead, the Stros managed just one hit off of four Braves relievers.
On a club that struggles to score runs as much as the Stros, it is inexplicable how management allowed Jimy Williams and now allows Phil Garner for the past two games to continue not to play Mike Lamb, the club?s fourth best hitter this season behind only Berkman, Beltran, and Bidg. Simply astounding.
Roy O takes his turn tonight in the first game of the weekend series against the Expos? Rocky Biddle, who has almost a 7.00 ERA. The Stros embark on a nine game roadie after the Expos series against the Mets, Expos, and Phillies.

Enron trader cops plea

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John Forney, former manager of Enron Corp.’s online trading desk, pleaded guilty today to charges in California that he manipulated energy markets during California’s power crisis.
Mr. Forney, who is 42, is the third Enron executive to plead guilty to manipulating electricity prices from Enron’s now-defunct trading office in Portland, Ore. Former Enron executives Timothy N. Belden and Jeffrey S. Richter pled guilty last year and have been cooperating with the Justice Department in its continuing investigation into Enron.
As a part of the plea bargain, Mr. Forney is expected to cooperate with the ongoing investigation into Enron’s trading desk and how other energy firms may have played a role in manipulating energy markets. Four employees of Reliant Corp. have already been charged with deliberately shutting down power plants to increase the price of California electricity.
Over two and a half years after Enron collapsed into bankruptcy, the first criminal trial involving former Enron executives is currently scheduled to begin in Houston on August 16 before U.S. District Judge Ewing Werlein in the case known as “The Nigerian Barge case.”

Enron goes nuclear on the PBGC

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Enron Corp. has forcefully asked the New York Bankruptcy Court overseeing its chapter 11 case to enjoin the Pension Benefit Guaranty Corp.’s lawsuit in Houston to take over four of Enron’s retirement plans.
In pleadings filed Wednesday, Enron accused the PBGC of, among other things, forum shopping, attempting to frustrate its reorganization plan, and usurping the Bankruptcy Court’s authority to consider claims against the company. Not bad for starters.
In short, Enron accused the PBGC of trying to obtain in the Houston U.S. District Court what it could accomplish in the New York Bankruptcy Court during the confirmation hearing on Enron’s plan. The Bankruptcy Court previously denied the PBGC’s objection to Enron’s plan, which the Bankruptcy Court confirmed on July 15.
The PBGC — which provides a measure of subsidy for defunct private-sector pensions — is trying to proceed with a lawsuit that it filed June 3 in U.S. District Court in Houston to terminate Enron’s four woefully underfunded pension plans.
By pursuing the termination action in Houston federal court, Enron asserts that the PBGC is trying to avoid Enron’s plan treatment for its unliquidated and contested claims and elevate those claims over those of similarly situated creditors. The PBGC has asserted claims against Enron totaling over $300 million for the Enron-related pension plans — the Enron Corp. Cash Balance Plan, Garden State Paper Pension Plan, Enron Financial Services Pension Plan, and San Juan Gas Co. Pension Plan. Those four plans have approximately 17,000 participants.
As long as the agency’s claims remain unresolved, Enron is required to reserve under its reorganization plan for the full amount of the PBGC’s claims. If the PBGC claims are disallowed or reduced, then the amount Enron will have to pay to terminate the four pension plans will likely be substantially less than the amount that the the PBGC seeks in its termination action. Enron contends that the Bankruptcy Court must determine the amount of the PBGC claims before the termination action can proceed and, thus, asserts that the Bankruptcy Court should enjoin the PBGC from proceeding with the termination action in Houston federal court.