Monthly Archives: January 2005

The Putin Puzzle

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The Wall Street Journal’s ($) Holman Jenkins, Jr. finally weighs in on the Russian government’s heavy-handed takeover of OAO Yukos, and he correctly notes that the Yukos case signifies the end of any hope that Russian president Vladimir Putin will lead the country toward a European-style social democracy with an economy based on at least reasonably free markets:

Foreign investors puzzle over Mr. Putin and his seeming ineptitude at making Russia into Thailand writ large, a gracious and dutiful partner for trade and finance. But perhaps Mr. Putin never really had “reform” in mind. Western imaginations didn’t quite grasp that Saddam Hussein fancied himself a conqueror, an empire builder, a man of destiny (and was content to limit his country’s economic potential to the oil under his direct control). Western leaders and investors may be suffering from a similar myopia when it comes to Mr. Putin.

Mr. Jenkins goes on to point out that, despite Mr. Putin’s tactics, Western investors continue to line up to invest in various Russian business ventures. That’s true, but my sense is that it is a relative trickle in comparison to what the West would be willing to invest in Russia but for the Russian government’s takeover tactics. Until that changes, Russian economic development will continue to lag far behind the West.
Along similar lines, Boston Globe columnist Cathy Young — author of Growing Up in Moscow: Memories of a Soviet Girlhood (Ticknor & Field, 1989)– provides this Reason Online article on Mr. Putin and the implications of his grip on the Russian government for the West.

The WSJ on the case against Ken Lay

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This John R. Emshwiller and Rebecca Smith Wall Street Journal ($) article provides an overview of the Justice Department’s criminal case against former Enron chairman and CEO, Ken Lay.
Mr. Emshwiller and Ms. Smith have been covering the Enron scandal from the beginning and have written a book on the subject — 24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America (HarperBusiness 2003) — that certainly would prompt one to question their objectivity in writing about the issues covered in the article. As noted several times in this blog, the best book on the Enron affair to date has been the one written by Fortune reporters Bethany McLean and Peter Elkind, Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio 2003). So, if you want to read just one book on the Enron scandal, read the latter.
Nevertheless, Mr. Emshwiller and Ms. Smith at least acknowledge in the article that the government’s case against Mr. Lay is difficult because it largely relies on public statements that he made in support of Enron as the company was spiraling downward during the latter stages of 2001. What you will not find in the article is any meaningful analysis of the policy implications of the government prosecuting a businessman for the “crime” of making public statements about a troubled company that were clearly intended to try and save the company for the benefit of its shareholders and employees. Apparently, the government prefers that Mr. Lay not have said anything and ensured that Enron went down in flames?
This previous blog post provides a more objective analysis of the policy implications of the government’s case against Mr. Lay. The demise of Enron effectively marked the end of a speculative stock market bubble that was the result of many bad decisions by businesspersons and investors alike. There was even criminal behavior involved in some instances. However, to paint the entire management team involved in a business failure such as Enron as criminals is akin to using a sledgehammer where surgical precision is needed. The results of such an approach are hopelessly arbitrary and capricious, as we have already seen with cases such as those involving Jamie Olis , Sheila Kahanek, and Global Crossing, Ltd. Indeed, such questionable prosecutions are how someone such as Mr. Olis ends up serving a longer prison sentence than a true business criminal such as Martin Frankel.
Mr. Emshwiller and Ms. Smith do not have much interest in exploring this angle of the Enron case. That’s a shame, because it may just be the most important policy issue arising from the scandal.

USC, National Champs

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USC 55 Oklahoma 19

In another bowl game that was not as close as the final score indicates, the USC Trojans absolutely laid the wood to the Oklahoma Sooners in the BCS National Championship Orange Bowl game on Tuesday night.
In this previous post on November 7, I noted that OU’s defensive secondary was probably not good enough to beat USC, and that certainly turned out to be the case as USC QB Matt Leinart (18-35 for 332 yds; 5 TD’s; 0 Int) sliced and diced the OU secondary as if he was preparing a salad.
Meanwhile, OU’s offense could never find a rhythm against the speedy USC defense. OU QB Jason White (24-36 for 224 yds; 2 TD’s; 3 Int) finished a marvelous college career by throwing three interceptions and looking generally overwhelmed the entire game.
White’s first interception — the result of a brain fart decision of throwing into triple coverage while under pressure — was arguably the turning point in the game. It came at the end of the first quarter as OU appeared poised to tie the game at 14, and USC promptly took the ball and drove for a quick TD and a 21-7 lead. After an OU receiver slipped and White threw another interception on the next possession, the Trojans quickly scored another TD and the game was effectively over.
USC is now 34-3 over the past three seasons with one and a half National Championships and two Heisman Trophy winners. They are now indisputably the best program in college football at this time.

Krispy Kreme moves closer to the brink

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Krispy Kreme Doughnuts Inc. continued its slide toward chapter 11 as the company announced today that it plans to restate its results for fiscal 2004, that its failure to file financial reports will put it in default on its credit facility by mid-January, and that it has guaranteed payment of money borrowed by franchisees who are also in default of their debt agreements. Here are earlier posts that chronicle Krispy Kreme’s mounting financial problems.
The company said the restatement in earnings would would reduce net income for 2004 by between $3.8 million and $4.9 million, or 6.6% to 8.6%. The restatement is primarily due to improper accounting of the company’s acquisition of its Michigan franchisee, which is a problem that the company had previously acknowledged. Krispy Kreme has borrowed about $91 million under its credit facility, and does not currently have the capacity to borrow any more.
The trendy doughnut retailer has been hammered over the past year by a lethal combination of slowing sales growth, multiple investigations of its accounting and corporate governance practices (including investigations by the Securities and Exchange Commission and a special committee of the Krispy Kreme board), and mounting litigation pressure from various shareholder lawsuits. Today’s news knocked the company’s share price dow 10%, to $11.03 in midmorning trading on the New York Stock Exchange. Krispy Kreme’s stock price topped out at $49.74 during the summer of 2003.
Particularly troubling for creditors was the company’s announcement that about 30% of the $52 million of franchisee debt that the company has guaranteed is held by franchisees who are in default under their debt agreements. Although the company asserts that it has adequate liquidity on hand to pay for current operations, that cash will not be sufficient to pay any meaningful portion of that guaranteed franchisee debt anytime in the near future.
Compounding the company’s problems is an allegation that was made in one of the multiple shareholder lawsuits that has been filed against the company recently. The plaintiffs in that lawsuit — citing confidential former Krispy Kreme employees — contend that the company routinely padded its sales numbers by doubling doughnut shipments to wholesale customers at the end of each fiscal quarter.
It does not look like this is going to end well for Krispy Kreme’s current shareholders. Do you think Krispy Kreme will supply the doughnuts at its First Meeting of Creditors? Stay tuned.

North Texas innovators

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Check out this interesting Cheryl Hall article in the Dallas Morning News that profiles 36 North Texas innovators who have changed the way we live. It’s not your typical place that can produce both the researchers who discovered statin drugs and the fellow who invented the first frozen margarita machine. Hat tip to Virginia Postrel for the pointer.

Posner on planning for unlikely catastrophes

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Seventh Circuit Court of Appeals Judge, law professor, economics and law guru, and author Richard Posner has written — in light of the recent Indian Ocean Tsunami disaster — a timely new book, Catastrophe: Risk and Response (Oxford, Oct. 1, 2004), in which he argues that governmental planning for even unlikely disasters makes economic sense. Peter Singer reviews Judge Posner’s new book here.
Judge Posner summarizes his argument in that regard in this Wall Street Journal ($) op-ed, and makes the following point that should give pause to those who advocate further cuts in NASA’s budget:

An even more dramatic example [of lack of planning for unlikely disasters] concerns the asteroid menace, which is analytically similar to the menace of tsunamis. NASA, with an annual budget of more than $10 billion, spends only $4 million a year on mapping dangerously close large asteroids, and at that rate may not complete the task for another decade, even though such mapping is the key to an asteroid defense because it may give us years of warning. Deflecting an asteroid from its orbit when it is still millions of miles from the earth is a feasible undertaking. In both cases, slight risks of terrible disasters are largely ignored essentially for political reasons.
In part because tsunamis are one of the risks of an asteroid collision, the Indian Ocean disaster has stimulated new interest in asteroid defense. This is welcome. The fact that a disaster of a particular type has not occurred recently or even within human memory (or even ever) is a bad reason to ignore it. The risk may be slight, but if the consequences, should it materialize, are great enough, the expected cost of disaster may be sufficient to warrant defensive measures.

Halliburton’s chapter 11 strategy

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Houston-based Halliburton Co. announced on Monday that it had consummated an innovative $5.1 billion settlement with asbestos claimants.
Halliburton became exposed to about 400,000 asbestos claims through its acquisition of Dresser Industries Inc. in 1998, which was a deal that former Halliburton CEO and current U.S. Vice President Dick Cheney promoted. The claims were asserted against a former Dresser subsidiary, Harbison-Walker Refractories.
The settlement allows two large units of Halliburton to emerge from chapter 11 cases and opens the door for Halliburton to sell its Kellogg Brown & Root (“KBR”) construction and government-contracting unit. The KBR has been the subject of considerable scrutiny this past year over the unit’s handling of a $10 billion contract to provide support services for the military in Iraq.
As with many companies, the liabilty represented by the asbestos claims has been a huge monkey on Halliburton’s back — Halliburton has booked more than $3 billion in asbestos-related charges since 2002. The settlement allows Halliburton to take advantage of the current favorable market for the oil field services industry that is based on strong demand for such services from exploration and production companies. In anticipation of the settlement, Halliburton’s share price has surged by about 25% over the past quarter, closing yesterday at $38.02.
Under its innovative chapter 11 strategy, Halliburton effectively used its profitable oil field service business to support the company’s operations while it promoted a settlement plan that liquidated the amount that Halliburton would have to pay current and future asbestos claimants. Although other companies have used chapter 11 as part of an overall litigation strategy against asbestos claimants, Halliburton’s strategy to dedicate 59.5 million company shares and $2.8 billion in cash to create a $5.1 billion trust fund to pay current and future asbestos claimants faciliated the settlement while most other companies remain locked in settlement negotiations with lawyers for asbestos claimants.
The case has been closely watched as most other companies have elected to try and resolve their unliquidated liability for asbestos claims through the unwieldly and inconsistent civil justice system. More than 70 companies — including large companies such as ABB Ltd., W.R. Grace & Co., Federal-Mogul Corp. and Owens Corning — have filed chapter 11 cases for themselves or a business unit because of huge asbestos claims, but many of those companies continue to fight with the asbestos claimants and have failed to liquidate the amount that the companies will ultimately have to pay current and future claimants. Many of those companies are actively lobbying for federal tort-reform legislation that would limit mass tort lawsuits and create a universal fund to pay asbestos claims.

Updating the Yukos case — What is going on with Yugansk?

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After announcing late last week that Yuganskneftegaz (“Yugansk”) — OAO Yukos‘ former primary production unit — would not be transferred to state-controlled OAO Gazprom as anticipated, the Russian government announced over the weekend that Yugansk is now operating as a subsidiary of OAO Rosneft, the Russian government’s oil company that is currently merging with Gazprom.
This latest news confirmed that nobody in the West really has a clue of what the Kremlin has planned for Yugansk.
In the meantime, the China National Petroleum Corp. told the Wall Street Journal ($) that they were not aware of the Kremlin’s offer of a stake in Yugansk reported in this previous post. The Journal article speculates that the Kremlin-China talks regarding Yugansk are taking place at the highest levels of the two governments and that the details simply have not been delegated to the operators of the state-controlled oil companies yet.
The Russian government previously forced the sale of Yugansk last month to defray the government’s alleged back-tax claims against Yukos that total $28 billion. After a Houston Bankruptcy Court issued a TRO in Yukos’ chapter 11 case enjoining any Western financial institutions from participating in the auction, a shell bidder emerged at the auction to buy Yugansk for $9.4 billion. Rosneft subsequently agreed to buy the shell bidder for an undisclosed amount. A hearing is scheduled in the Houston Bankruptcy Court this Thursday on Gazprom’s motion to dismiss the Yukos’ chapter 11 case. Here are the previous posts on the Yukos’ chapter 11 case and related matters.
Finally, as if the Russian government’s handling of Yukos was not enough of a deterrent to Western investment in Russian business interests, this Wall Street Journal ($) article notes that the measures taken by prosecutors and the Russian courts have exacerbated the vulnerability of defense lawyers who represent interests competing with those of the Russian government in the notoriously political Russian judicial system. As the Journal article observes:

In recent months, the arrests and interrogations of Yukos lawyers have fueled fears that those who defend politically unpopular clients could themselves become targets. Two senior Yukos legal officers fled Russia this fall to escape criminal prosecution, while a lower-ranking colleague who stayed, Svetlana Bakhmina, was arrested last month. Another Yukos legal consultant, Elena Agranovskaya, was detained a day later. Prosecutors also have launched sweeping searches and interrogations of other Yukos lawyers and middle managers.

Along these same lines, note this Boston Globe article on the fear and self-censorship that is occurring under the Putin regime in Russia. One of the emerging business issues of 2005 is the degree to which the above-described Russian government actions will chill badly needed Western investment in Russian business interests?

2004 Weekly local football review

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Browns 22 Texans 14

In an effort to compete with the Aggies for the most uninspired effort of the holiday season, the Texans laid an egg against the hapless Browns in the final game of the 2004 season. The loss prevented the Texans from achieving an 8-8 record in their third NFL season and left a sour aftertaste to a season of undeniable progress for the Texans.
The main flaws in the Texans’ squad were on full display in this one. The Browns’ pass rush manhandled the Texans’ offensive line, so Texans QB David Carr (15-25 for 114 yards; 1 TD; 0 Int) was running for his life most of the day. Moreover, inasmuch as Carr has below average recognition skills, the Texans could not combat the Browns’ fierce pass rush with short drops and passes to hot receivers. Consequently, the Texans’ passing game was rendered utterly ineffective in this game, averaging a full yard less per play than the Texans’ rushing attack.
Frankly, the Texans’ problems in the offensive line are not surprising given that the Texans’ management has made some particularly bad choices in this personnel area. The Tony Boselli deal was a bust, and then the Texans wasted a high draft choice in their second draft on tight end Bennie Joppru, who has not played a down for the Texans.
Partly as a result of these questionable decisions, the Texans are playing Seth Wand — an inexperienced second year player from a small college program — at the key left offensive tackle position. Although the Texans have veteran offensive linemen Steve McKinney (7 yrs), Todd Wade (5 yrs), and Zack Wiegert (10 yrs) playing regularly, a football team is only as strong as its weakest links in this area. And the Texans’ key offensive line draft picks — Wand, Chester Pitts and Fred Weary — have been weak links to date.
If the Texans had a top flight QB, at least some of the problems in the offensive line would probably not be so apparent. However, through three seasons now, Carr has established that he is only an average NFL QB at best. Carr is not a bust such as Tim Couch or Ryan Leaf, but he is simply not good enough to overcome the current limitations in the Texans’ offensive line.
Interestingly, the rest of the Texans’ personnel areas are in reasonably good shape. Oh, they could use a dominant defensive lineman (couldn’t every team?) along the lines of the Oilers’ Curly Culp from a generation ago. Similarly, another big wide receiver to take pressure off of the talented but underutilized Andre Johnson would also be helpful. But none of these other holes are as big as the ones on the offensive line. So, assuming that the Texans’ management can plug those, the Texans appear to be on track to be a playoff contender by their fifth season in the NFL.
By the way, I know that the Texans’ loss to the Browns was bad, but is that really a reason for this, particularly after this a couple of weeks ago?

Giants 28 Cowboys 24

In an absolutely appropriate ending to a miserable season, the Cowboys snatched defeat from the jaws of victory as they scored with 1:49 to play to take a 24-21 lead, and then allowed the Giants to march down the field and score the winning TD with 11 seconds left. The rebuilding job at Dallas looks to be so extensive at this point that I cannot see the Big Tuna lasting much longer as coach of the Pokes. Good thing that vote on the new stadium occurred in early November rather than early January.

Texas Longhorns 38 Michigan 37

In a hugely entertaining Rose Bowl game, the Horns’ Vince Young put on a show for the ages as UT kicker Dusty Mangum‘s 38 yard field goal as the clock expired won it for Texas. The win was the first for Texas in a BCS Bowl game, and at least loosened the hold of that big monkey on UT Coach Mack Brown‘s back that was mentioned in this previous post.
Michigan’s offense performed admirably against the Horns’ quick defense, efficiently using their 355 yards of total offense to score 37 points. Freshman Michigan QB Chad Henne (18-34 for 227 yds, 0 int) was very good, throwing four TD passes, including three to All-World WR Braylon Edwards.
Nevertheless, the Michigan defense simply could not contain Young, who glided like a gazelle through and around the Michigan defenders while scoring 4 TD’s, rushing for almost 200 yards, and generating just under 400 of Texas’ 444 yards of total offense. Young is simply the type of rare athlete who looks like he could dominate a basketball game or a track meet just as readily as a football game.
By the way, the videotape of this game is almost certainly destined to become one of the most effective tools in coaching circles for teaching how not to cover kickoffs. Between Michigan’s Steve Breaston and Texas’ Ramonce Taylor, the teams combined for over 420 yards on kickoff returns, averaging a remarkable 32.5 yards per return. Texas’ kickoff coverage was so bad that, by the fourth quarter, I was urging Coach Brown to direct his kicker simply to kick the ball out of bounds on kickoffs so that Michigan would be “backed up” to its 35 to start their next drive.
Also, the Iowa-LSU Capital One Citrus Bowl game that was on ABC immediately before the Rose Bowl game had an even more incredible ending as Iowa QB Drew Tate (from Baytown, just east of Houston on I-10) threw a 55 yard TD pass as time expired to pull it out for the Hawkeyes. Between that game and the Rose Bowl, ABC had an incredibly engaging eight hours of college football on this New Year’s Day.

Tennessee 38 Texas Aggies 7

In a game that was not as close as the final score indicates, the Volunteers had a 21-0 lead over the hapless Aggies with over 13 minutes to go in the second quarter of the 2005 Cotton Bowl. As with the Texans’ loss to the Browns, this was a disappointing ending to a season of decided overall progress for the Aggies.
Although the Aggies performed surprisingly well this season while playing one of the nation’s most difficult schedules, the last two games against Texas and Tennessee exposed the Aggies’ weakness vividly. Both Texas and Tennessee’s defenses were quick and strong enough to shut down A&M’s rushing attack while bringing pressure on A&M QB Reggie McNeal in a manner that kept him in the pocket while passing. Without an effective rushing attack and McNeal’s scrambling outside the pocket, A&M’s offense was rendered largely ineffective in their final two games this season. Eventually, turnovers in both games wore the Aggies’ defense down, and the Aggies were unable to make much of a game out of either contest.
Accordingly, as with the Texans, the Aggies need to make considerable off-season upgrades in their offensive line in order to continue this season’s progress against an equally difficult schedule next season.

Sabermetrics for golf?

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This blog has often noted (for example, here, here and here) the increased utilization of statistical analysis in professional sports to evaluate player performance.
Now, statistical analysis of professional golf is on the rise. This fascinating Jamie Diaz Golf Digest article reviews the PGA’s Shotlink program, which is a statistical engine that has measured every shot by every player in nearly every tournament (the four majors excluded) over the past two years. ShotLink compiles data in more than 250 statistical categories for every player. However, other than the occasional pearl that a television golf analyst might offer, the general public has not been provided with any meaningful analysis of the underlying data that Shotlink has gathered.
Mr. Diaz’s article changes that. As he notes:

[W]hen it comes to addressing pro golf’s most interesting question–what separates the best from the very good–ShotLink shines. . . [F]ive [statistical categories] have clearly emerged as leading indicators and predictors of success: “birdie average,” “par breakers,” “par-5 scoring average,” “par-5 birdie percentage” and “going for the green” (the percentage of times a player tries to drive a par 4 or hit a par 5 in two.) In these stats in 2004, the worst ranking recorded by any of the top five players in the world–Vijay Singh, Tiger Woods, Ernie Els, Retief Goosen and Phil Mickelson–was eighth (Goosen in par breakers and Lefty in par-5 birdie percentage). Singh finished first in all but par-5 birdie percentage (Goosen led with 55.3). Woods and Els were in the top five in all five categories.

Moreover, Mr. Diaz notes that certain statistics that were previously thought to be important performance indicators really are not:

Meanwhile, categories commonly considered crucial to success were not as correlative. In greens in regulation, for example, Singh was second, but Mickelson was 10th, Goosen 17th, Woods T-47, and Els T-83. John Senden and Chris Smith, top-10 finishers in GIR, finished 114th and 115th on the money list. Nor did the long-valued total driving category (the total of rank in driving distance and driving accuracy) prove vital, with Mickelson finishing T-33, Goosen T-53, Singh T-50, Woods T-87, and Els T-112. The category leader was Jeff Brehaut, who had to return to Q school.

In addition, Shotlink generates some flat out incredible statistics:

In 2004, 31 players hit measured drives longer than 400 yards, the longest being 476 by Davis Love III on the launching pad of the downhill 18th at Kapalua’s Plantation course, site of the Mercedes Championships. Brad Faxon went 362 holes without a three-putt, and Ernie Els ranked 113th in sand saves. Although Sergio Garcia is statistically the best on tour between 125 and 150 yards, in the 34 statistical categories that measured his shots within 75 yards of the hole he is 122nd or worse in all but four of them, and no better than 45th in any of them.

362 holes without a three putt? Folks, that is over 20 rounds under tournament pressure without a three putt. That has to be on par with Joe Dimaggio’s record of having a base hit in 56 consecutive MLB games.