Daily Archives: December 29, 2004

Tsunami Relief Donation

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I have added a hyperlink on the right side of the blog for Amazon’s Red Cross Tsunami Relief Donation page.
The power of the Internet allows us to make a donation quickly and easily to help subsidize relief efforts for this disaster. If you are financially able to do so, please take advantage of this wonderful resource. As of this post, the Amazon page has generated $1.9 million in donations for the relief effort.
If you prefer to make your donation through another organization, The Command Post has provided this extensive listing of hyperlinks to various relief organizations.

Updating the Yukos case — Yukos defaults on huge loans

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OAO Yukos, the Russian oil company wallowing in a chapter 11 case in Houston, had its credit-rating slashed to default status yesterday after it failed to make the interest payments on a $1 billion loan from a syndicate of western banks and a $1.6 billion loan to Menatep, which is also its largest shareholder. Security for the loans was Yukos’ interest in Yuganskneftegaz (“Yugansk”), the oil unit that the Russian government auctioned off earlier this month to defray Yukos’ alleged $27 billion in overdue taxes. Here are the earlier posts on the Yukos chapter 11 case.
Meanwhile, in Houston, Deutsche Bank filed a motion to dismiss the Yukos chapter 11 case with the Houston Bankruptcy Court on Tuesday. Duetsche Bank was was one of a group of Western banks that had committed to finance OAO Gazprom‘s acquisition of Yugansk at the Russian government’s auction before the Houston Bankrutpcy Court’s temporary restraining order enjoined the bank and other Western financial institutions from participating in the auction.
In its motion, Deutsche Bank asserted that Yukos had tried to “artificially manufacture” a presence in the U.S. in order to seek bankruptcy protection. In obtaining the TRO earlier this month, Yukos had preliminarily persuaded the Bankruptcy Court that it had jurisdiction over Yukos based on, among other things, the fact that it had stablished a bank account in Houston, that its chief financial officer had recently moved to Houston and was working there, and that approximately 15% of Yukos is owned by investors from the United States.

My nomination for Sportsman of the Year

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Oregon State’s football team handed Notre Dame its seventh straight bowl loss last night in the Insight.com Bowl in Phoenix. However, for my money, the real story from that game is Oregon State’s kicker, a 19 year old freshman named Alexis Serna, who walked on the Oregon State football team before this season without a scholarship.
Four months ago, after having attended just a few classes at Oregon State, Mr. Serna was the goat of college football after blowing three extra points in a one-point loss to then number one ranked LSU. As SI.com columnist John Walters writes in this wonderful article on Mr. Serna:

So imagine waking up as Alexis Serna in Corvallis, Ore., on the morning of Sept. 5. You don’t have a scholarship. You’ve only dressed for one game in your college career and the entire country — yourself included — is blaming you for Oregon State’s loss the night before. And someone at ESPN refers to any missed PAT as “pulling an Alexis Serna.” You are 19 years old.

Remarkably, Mr. Serna overcame the humiliation of his first college football game to nail 40 of his next 41 kicks — including 16 of 17 field goal attempts — to make the second team All Pac-10 team. Late last month, Mr. Serna’s coach rewarded him by giving him an athletic scholarship. From my vantage point, Mr. Serna ought to be awarded Sportsman of the Year.

More Ed Prescott on Social Security reform

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2004 Nobel Prize in Economics recipient Edward C. Prescott wrote this earlier Wall Street Journal ($) piece advocating a restructuring of the current Social Security system to one based on mandatory individual retirement accounts.
In this op-ed from today’s WSJ, Professor Prescott again makes the case for converting Social Security to a system based on mandatory savings accounts, and makes his case with powerful reasoning based on simple common sense:

Social Security was developed at a time when the number of workers paying into the system greatly outnumbered those who were receiving funds, and thus the promise made by government was easily kept. But times change while policies atrophy, and Social Security has evolved into a system that places an increasingly onerous burden on the young; the ratio of workers to elderly has shifted from 41-to-1 in the 1930s, to 3-to-1 today.

Professor Prescott points out that it is rational for young workers to protest having to pay a disproportionate amount to subsidize such a system by working less to support such a system. Thus, he argues, let’s change the system to address such rational behavior:

Would such changes in tax rates and changes in government promises affect labor supply? Theory says “yes,” the statistical evidence agrees, and common sense concurs. These young workers are rational. They make labor/leisure choices on the margin, and these marginal choices add up.

So what to do? How to move from a pay-as-you-go welfare system to a self-funding retirement system that benefits from individual maximizing incentives? Again, the answer begins with the insight that labor supply is responsive to tax rates. We simply cannot keep cranking up Social Security taxes with impunity. What we need to do is turn the present tax-and-transfer system into a bona fide individual retirement system that is in line with individual incentives.
In short, the answer is to establish a system of mandatory investment accounts for retirement. Why mandatory accounts? Because without mandatory savings accounts we will not solve the time inconsistency problem of people under-saving and becoming a welfare burden.

And Professor Prescott observes that private retirement investment accounts must be made mandatory precisely because people are rational with their money:

The reason we need to have mandatory retirement accounts is not because people are irrational, but precisely because they are perfectly rational — they know exactly what they are doing. If, for example, somebody knows that they will be cared for in old age — even if they don’t save a nickel — then what is their incentive to save that nickel? Wouldn’t it be rational to spend that nickel instead?
So, indeed, people are acting rationally when they choose not to save. We have rational people making choices based on the rules. The trick is to get the rules right. A mandatory retirement system, properly designed, would establish effective rules.

And then with the wisdom that generated a Nobel Prize, Professor Prescott bores in on the main problem confronting Social Security reform and advises on how to overcome it:

No sooner did talk get serious about fixing Social Security in recent weeks than the political boo-birds went to work scaring people away from new ideas. It’s rare to open a newspaper editorial page these days and not find some Cassandra screeching about evil policy-makers and cranky politicians who are trying to destroy Social Security. Why a politician from any party would want to intentionally destroy a retirement program meant to benefit the elderly is beyond me. Such political claptrap makes me glad I’m an economist. Granted, politics is a game with its own rules and incentives, and people will rationally play by those rules for political gain, but such political role-playing certainly complicates matters, at best, and makes for bad policy, at worst.
Maybe one way to help avoid ad hominem attacks and political labeling would be to recast the Social Security question from one of reform to one of reconstruction. Let’s stop talking about reforming Social Security — let’s rebuild it. In other words, if we could wipe the slate clean, what kind of government retirement program would we build from scratch today? It’s one thing to snipe at new proposals, but it takes a plan to beat a plan, and I’m willing to bet that the best minds of both political parties, given such a charge, would not come up with a government retirement program as it currently exists.

Read the entire piece. Ed Prescott is a true clear thinker.

WSJ profiles the Texas Pacific Group

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This Wall Street Journal ($) article profiles the Texas Pacific Group, the Fort Worth-based investment fund founded by former bankruptcy lawyer David Bonderman and business whiz Jim Coulter in 1993.
Originally established to invest in and restructure Continental Airlines to avoid a third bankruptcy case for the airline, TGP has raised over $15 billion, with which it has bought control of companies ranging from Continental to the clothing retailer J. Crew to the Enron’s Northwest pipeline subsidiary, Portland General Electric. TGP is now one of the busiest and most-successful private-equity boutiques, controlling companies with combined annual revenue of more than $40 billion. Before fees, TGP’s return to investors have averaged 55% annually.
Interestingly, TGP’s success is directly tied to its policy of never hesitating to take on troubled companies that its competitors avoid. Moreover, despite its strong reputation and track record, TGP prefers to play behind-the-scenes — it is so invisible that it does not even have a Web site.

“The market often thinks we are crazy when we invest,” Mr. Coulter told the WSJ. “We have, however, made a decent living proving the market can be wrong.”

Read the entire article.

The Mismanagement of the Houston Rockets

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Although I have followed basketball most of my life, I find it difficult to generate any enthusiasm for the Houston Rockets.

It has not always been that way. I moved to Houston in 1972 at about the same time as the Rockets franchise moved to Houston from San Diego, so I have always felt a connection to the club.

My late father and I used to attend Rockets games regularly, even back before the Rockets had their own arena. Until 1975, the Rockets played mostly at Hofheinz Pavilion on the University of Houston campus.

Then, in 1994-5, the magnificent Hakeem Olajuwon led the Rockets to two straight NBA titles, the second of which was achieved with the help of local legend Clyde Drexler, who originally burst on the scene with Olajuwon on the University of Houston’s memorable Phi Slama Jama teams from 1982-84.

With the demise of the Oilers before their exodus to Nashville, and before the Biggio-Bagwell era of the Stros led to multiple MLB playoff appearances, the Rockets were the toast of the town for most of the 1990’s.

However, despite the two NBA titles, Rockets’ management has always had a curious tendency to make poor personnel decisions.

For example, after it was clear that Olajuwon would be a far better player than former number one draft pick, Ralph Sampson, the Rockets delayed trading Sampson until his value had eroded to the point that they could only get Sleepy Floyd and the eminently forgettable Joe Barry Carroll in return.

Even more galling is the fact that Rockets management overlooked talented local players such as Ricky Pierce (Rice), Bo Outlaw (UH), Rashard Lewis (Alief Elsik HS), and Damon Jones (UH), the last three of whom could be playing significant roles on the current Rockets club.

To make matters worse, the Rockets management decisions over the past several years have gone from dubious to just plain horrible.

First, they used a second overall pick in the NBA draft on Steve Francis — a good player who has limitations that will keep him from ever achieving elite stature in the NBA — who they proceeded to trade over this past offseason to Orlando as a part of the deal for the talented but injury-prone Tracy McGrady.

Rockets management used another number one draft choice on power forward Eddie Griffin, who was more interesting in the daily police report than the sports section during his short stay with the club.

Finally, Rockets management either gave or acquired expensive long term contracts on such mediocre role players as Matt Maloney, Moochie Norris, Brent Price, Maurice Taylor, Kelvin Cato, Juwan Howard — the list of bad personnel moves just goes on and on.

Comparing the public’s waning interest in the Rockets to the popularity of the Texans, one Houston businessman put it to me in this way: “How would you like to be trying to sell luxury suites to the Toyota Center?.”

Had Rockets management not at least had the common sense to draft and sign Yao Ming, things might be utterly hopeless at this point.

So, it is against this backdrop that Peter Vecsey, the longtime NBA columnist based in New York, absolutely lays the wood to Rockets management over the team’s latest move:

[I]t’s beyond comprehension what [Rockets General Manager Carroll] Dawson and [Rockets coach] Jeff Van Gundy are thinking.

Acquiring [New Orleans Hornets guard David] Wesley, 34, isn’t as irrelevant as the Mavericks swapping Dan Dickau (again, at least the Hornets got potential) for dead end Darrell Armstrong, but it’s not much better. . . Wesley will take shots away from Tracy McGrady and Yao Ming, and maybe even Hakeem.

. . . Wesley doesn’t loosely qualify as a pure point guard. Wherever he’s roamed he’s been a shoot-first, pass-as-a-last-resort type guard. Meanwhile, Jackson’s a deadlier shooter. Moreover, Wesley doesn’t give it up. I’ll say! He wouldn’t even make a pass at Kobe’s wife.

If Wesley’s arrival in Van Gundy’s starting backcourt isn’t opaque enough, this is the worst he’s played since the bad old days in New Jersey and Boston, his first two pro seasons.

And Vecsey goes on to point out that the Wesley deal isn’t the only bad one the Rockets have made lately:

Not to say Wesley, even in his current state of disrepute, isn’t an improvement on what the Rockets have on playmaking patrol. On second thought, I will say it; at best, he’s a Bob Sura clone and substantially superior to Charlie Ward, whose game is so shabby four houses of worship refused him sanctuary.

These are the two pointless guards management chose to sign last summer as free agents to “complement” Tyronn Lue, exchanged last week for Jon Barry, whose poisonous attitude and bad mouthing of coaches when not playing has led to his last three change of addresses.

Obviously, Van Gundy had some say regarding the recruitment of his perennial pet mistake. Ward got $1.7M and $1.8M guaranteed with a $2.04M team option. Why wait, Jeff? Pick it up right now. Nobody else was offering more than a 10-day contract. But Carroll, who helped Rudy Tomjanovich assemble Houston’s two title teams (’94-’95), has the (last) sway.

Carroll has been groping since, overpaying ineligible receivers as if he were bidding against Warriors whiz Chris Mullin. Maurice Taylor, Shandon Anderson, Howard Eisley, Matt Maloney (on the Rockets’ cap this season, his last, at last, for $3.237,250), Brent Price and Moochie Norris were all rewarded with senseless long-term contracts.

Sura was the latest to strike it rich without earning it, unless you deem last season’s stats (7.5 points, 2.9 assists, 1.3 turnovers and 41 percent from the field) for the hopeless Hawks noteworthy. Thanks to the Rockets’ tainted top talent scout, owner Les Alexander owes the 10-year rent-a-wreck $3.2M/$3.5M/$3.8M this year and the next two . . .

Thanks to Carroll (Van Gundy, too), the Rockets are being forced to restock, if not rethink. That might be asking too much.

So, Rockets owner Les Alexander is in a tough spot.

Both of Houston’s other major professional teams and their owners are more popular among Houstonians than the Rockets and Alexander. While the Texans and Stros play in front of record crowds, the Rockets are regularly having trouble drawing 10,000 people to their games. Although I am a regular target of the Rockets’ season ticket sales staff, I haven’t attended a game in years and have little interest in doing so.

Moreover, given the Rockets management’s dubious track record in player evaluation, it’s hard to be optimistic about the club’s prospects. Yao and McGrady are the only players on the Rockets team around whom a playoff caliber club could be built.

Nearly a decade has passed since the Rockets’ glory years. The club has declined dramatically since then, and the decline has accelerated over the past several years.

Absent considerable improvement in the club’s player evaluation process, my sense is that the Rockets will become even more of an afterthought on the Houston scene than they have already become.