Daily Archives: January 27, 2005

Can SBC eat AT&T?

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San Antonio-based SBC Communications Inc. is in talks to acquire AT&T Corp., a combination that could create the nation’s largest telecommunications company in an industry where companies are feverishly attempting to grow in an effort to keep up with new technologies and competitors.
So, over 20 years after the breakup of Ma Bell, the breakup may be coming full circle. SBC is now the second-largest U.S. regional phone company and one of the three huge telecoms to emerge from the consolidation of the Baby Bells. Although such a deal is fraught with hurdles before it could be consummated, the proposed merger would combine some of the largest pieces of the Ma Bell monopoly that was broken up in 1984. It appears that the primary attraction of the deal is linking SBC’s 50 million local-line customers with AT&T’s world-largest international fiber network and its large corporate client list.
The deal makes sense for AT&T because it is struggling to compete in the vicious long-distance price wars with MCI and the Baby Bells. Moreover, given AT&T’s diminished role in the industry, the Justice Department would be unlikely to try and block such a merger. Probably the biggest industry issue is how other big telecommunications companies such as Verizon and BellSouth will respond, particularly since BellSouth had similar talks with AT&T in 2003 that did not result in a deal.

Making Congressional voting transparent

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This post by Tom Mighell over at Inter Alia reminded me to pass along GovTrack (www.govtrack.us), a new site that will provide you email notification of up-to-the-minute information about Congress.
GovTrack differentiates itself from other sites devoted to Congress in that it sends users e-mail updates anytime there is activity on legislation that they want to monitor. GovTrack lets users track activity of specific legislators. It can also send updates via RSS, or Real Simple Syndication, which is the most efficient way to organize and review such updates, as well as blog updates. The site collects information from Thomas (thomas.loc.gov), which is the Library of Congress’s legislation tracking site, as well as the websites for the House of Representatives and the Senate. Check it out.

Ernst settles long pending Bank of New England malpractice claim

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Ernst & Young LLP agreed to pay an $84 million settlement two weeks into the ongoing trial of a long pending malpractice lawsuit in Boston over its audit work more than a decade ago for the defunct Bank of New England Corp. Here is an article that set the stage for the trial.
The bank’s bankruptcy trustee filed the lawsuit in 1993 accusing Ernst of malpractice, among other claims. The bank’s demise was triggered by the January 1990 announcement that it would report more than $1 billion in previously undisclosed losses on bad loans for its 1989 fourth quarter. Just four months earlier, the bank had raised $250 million through a public debt offering. The bank filed a chapter 7 (i.e., a liquidation) bankruptcy case in January 1991.
The settlement is yet another reminder of the litigation pressures that the Big Four accounting firms are currently facing over big business failures. Here are earlier posts on Ernst’s other legal problems over the past year.

Clear thinking on Social Security reform

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The Bush Administration’s initiative to reform the Social Security system has been criticized recently as being premature because the system is not really in crisis and there are more pressing fiscal problems, such as reforming the health care finance system. Well, Social Security is clearly not in as bad a shape as say, Medicare, but to put off reforming Social Security for that reason is akin to reasoning that there is no need to tend to that long overdue tune up of the family’s better car because it seems to be driving better than the family’s clunker.
In this Wall Street Journal ($) Capital column, David Wessel interviews Edward “Ned” Gramlich, a U.S. Federal Reserve governor who chaired the Social Security advisory commission during the Clinton Administration and is the former dean of the University of Michigan’s School of Public Policy. Although not enamored of the Bush Administration’s initial proposal for reforming Social Security, Mr. Gramlich nevertheless is a strong proponent for Social Security reform now:

I don’t think the system is in crisis. But we can make much more desirable changes if they’re made early. The problem with waiting until the car is about to go off the road is that our options are constricted. It’s hard to make sensible benefit cuts if people have already retired or are close to retirement. It’s easier to do if cuts are well-advertised. In the past, we have waited, the benefit system has expanded and we’ve raised the payroll tax. At some point, we can’t do that.

We can do much more sensible things if we act early. But it’s hard to generate the requisite urgency when the system is projected to be paying full benefits for the next 40 years or so. I’m not an advocate of the president’s general approach, but I have sympathy for arguments that the president’s people are making about the wisdom of acting now.

Read the entire interview.

The economics of extracting oil & gas

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One of the most interesting (and misunderstood) aspects of the energy business is the economics of extracting oil and gas. Those economics not only have much to do with the price that we end up paying for energy, but also the success or failure of investing in a particular exploration project.
In this instructive Wall Street Journal ($) op-ed, Peter Huber and former Reagan administration staffer Mark Mills — who are authors of the new book, The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy (Basic 2005) — make an interesting point about why energy prices tend to gyrate from time to time:

Oil prices gyrate and occasionally spike — both up and down — not because oil is scarce, but because it’s so abundant in places where good government is scarce. Investing $5 billion dollars over five years to build a new tar-sand refinery in Alberta is indeed risky when a second cousin of Osama bin Laden can knock $20 off the price of oil with an idle wave of his hand on any given day in Riyadh.
By simply opening up its spigots for a few years, Saudi Arabia could, in short order, force a complete write-off of the huge capital investments in Athabasca and Orinoco. Investing billions in tar-sand refineries is risky not because getting oil out of Alberta is especially difficult or expensive, but because getting oil out of Arabia is so easy and cheap.

Moreover, the authors point out that new technology is having a dynamic impact on the cost of extracting oil and gas:

The cost of oil comes down to the cost of finding, and then lifting or extracting. . . But these costs have been falling, not rising, because imaging technology that lets geologists peer through miles of water and rock improves faster than supplies recede. Many lower-grade deposits require no new looking at all.
To pick just one example among many, finding costs are essentially zero for the 3.5 trillion barrels of oil that soak the clay in the Orinoco basin in Venezuela, and the Athabasca tar sands in Alberta, Canada. Yes, that’s trillion — over a century’s worth of global supply, at the current 30-billion-barrel-a-year rate of consumption.

Here is the entire piece. Also, Tyler Cowen over at Marginal Revolutions has this comment on Messrs. Huber and Mills’ new book.

Juror Questionnaire in the Enron Broadband case

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This is the questionnaire that prospective jurors in the upcoming Enron Broadband criminal trial will be given. Here are the prior posts on the Broadband case, which is scheduled to crank up on April 1 in Houston before U.S. District Judge Vanessa Gilmore.