Monthly Archives: February 2005

Updating the Yukos case — Yukos narrows its bank lawsuit

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Wounded Russian oil company but American debtor-in-possession OAO Yukos has dismissed five banks from its tortious interference lawsuit that it has brought in federal court in Houston in connection with its pending chapter 11 case. Here are the previous posts on the Yukos case.
The lawsuit involves several Western banks alleged involvement in the financing of an auction bid on Yukos’ former production unit called Yuganskneftegaz (“Yugansk”), the Siberian oil giant that represents about 1% of world oil production. In December, the Russian government scheduled an auction of Yugansk to generate proceeds to pay Yukos’ alleged $28 billion tax debt to the government, which prompted Yukos’ to file a chapter 11 case in Houston in an effort to delay the auction. The Russian government went ahead with the auction despite the automatic stay under 11 U.S.C. ß 362 and a Bankruptcy Court TRO enjoining the auction, and Yukos then initiated the lawsuit against a number of Western financial institutions for alleged involvement in financing the winning $9.3 billion auction bid in violatio of the automatic stay and the TRO.
Yukos dropped affiliates of ABN Amro Holding NV, BNP Paribas SA, Calyon, JP Morgan Chase & Co. and Dresdner Kleinwort Wassertein from the lawsuit. Those banks had originally been members of a consortium of Western financial institutions that was prepared to finance an auction bid for Yugansk, but Yukos is now satisfied that these banks had nothing to do with the winning auction bid.
On the other hand, one of the banks that Yukos did not dismiss is Deutsche Bank, which is challenging the jurisdiction of the U.S. Bankruptcy Court over Yukos. The hearing on Deutsche Bank’s motion to dismiss the Yukos case is presently scheduled for February 16th in U.S. Bankruptcy Judge Letitia Clark’s Houston courtroom.

Canseco: “McGuire used steroids; Bush knew about players’ steroid use”

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Former MLB slugger Jose Canseco is writing a book, and early reviews indicate that he is implicating former home run champ Mark McGwire in the use of steroids and President Bush in the knowledge of their use during the time that he was CEO and part owner of the Texas Rangers.

The looming fiscal crisis over Medicaid

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This Wall Street Journal ($) article is an excellent overview of how subsidizing Medicaid is overwhelming state budgets across the country. The article uses the state of Mississippi as an example, where federal and state funding of the program has doubled from $1.8 billion to $3.5 billion over the past five years:

In the current fiscal year, which ends June 30, Medicaid is projected to cost $268 million more than the state budgeted. Officials are now warning that the program will run out of money by the end of this month unless the legislature passes an emergency appropriation. To open up funds for Medicaid, the state has slashed road construction and may delay plans to raise the salaries of public-school teachers who earn an average of about $35,000 a year.
Forty years ago, Congress, as an afterthought to the Medicare program for the elderly, created Medicaid to help pay for the medical needs of about four million low-income people. Today, the program covers 53 million people — nearly one in every six Americans — and costs $300 billion a year in federal and state funds, recently surpassing spending on the federal Medicare program. In some states, Medicaid accounts for one-third of the budget.

The article is quite good in describing the many facets of the dilemma, including the issue of how to ration care, the under-representation of poor people who truly need some type of subsidy for medical costs, and the knotty problem of trying to make a flawed government program more efficient:

As states try to slash costs under current rules, they run into many roadblocks. Federal law mandates that states must cover many types of care, such as pregnancy care for certain low-income women. Reducing the number of beneficiaries is hard because they often have nowhere else to turn. What’s more, because Medicaid is a “fee for service” program that pays doctors and hospitals every time they treat a fever or patch up a cut, it’s difficult to encourage efficiency.
Patients, too, have little incentive to ration their own care because they pay at most a small sum to see the doctor. “When something is free, people don’t care what it costs,” says [Governor Haley] Barbour in Mississippi.

Which reminds me of an observation that Milton Friedman made in an interview awhile back about the inefficiency of federal programs that interfere in the market’s allocation of services and products:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.
Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.
Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!
Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.

Read the entire article. As with the entire employer insurance-based, third party payor system of American health care finance, the Medicaid program has grown into a hulking mess largely because of the skewed economic incentives involved. Absent addressing the fundamental problem — i.e., the subversion of market forces in the allocation of health care — reforming the Medicaid program will be akin to rearranging the deck chairs on the Titanic.
Social Security reform is necessary over the long term, but the more pressing need in his country is the reform of the health care finance system. The introduction of Health Savings Accounts is a good start, but the Bush Administration and Republican Party’s reluntance to address the fundamental problems in our society’s third party payor system of financing health care may doom our children and grandchildren to the worst of all results — that is, socialized health care finance by default.

Why some baseball teams are chronically bad

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In this earlier post about the Stros failed effort to re-sign Carlos Beltran, I observed that sometimes the best deals for a ballclub turn out to be the ones that the club doesn’t make.
Despite the overpriced contracts that the Stros’ gave Bags and Richard Hidalgo, and the lesser mistakes that the club continues to make by unnecessarily signing such awful players as Brad Ausmus and merely mediocre ones such as Jose Vizcaino, the Stros by and large have done a reasonably good job over the past decade of allocating their limited payroll resources. The result has been a very good run over that span in which the club has won the National League Central Division four times (1997-1999; 2001), made the League Championship Series once (2004), and finished below second place in its division only once (2000).
To make you appreciate the Stros even more, consider the case of the Detroit Tigers. The Tigers have been to the playoffs exactly once (1987) since winning the World Series 20 years ago in 1984. Over the past 12 seasons, the club’s best finish has been third in their division, and the club has only accomplished that feat three times. During that span, the Tigers have finished dead last in their division exactly half (6) of the time. To give you an idea of how bad it has gotten in Detroit, the club improved its record last season by 29 games from the previous season and the Tigers still finished with a 72-90 record! Consequently, just as the Stros have been one of the most successful clubs in Major League Baseball over the past decade, it is fair to say that the Tigers have been among the most dreadful.
To give you an idea of why the Tigers are so chronically bad, take a look at the contract that the club just gave Magglio Ordonez:

The Detroit Tigers snared the last remaining premier free agent of the offseason, agreeing to a $75 million, five-year contract with outfielder Magglio Ordonez, . . . Ordonez’s deal could be worth up to $105 million over seven seasons, . . .

Probably to avoid a malpractice lawsuit from their fans over this contract negotiation, the Tigers at least hedged their risk on this absurd deal somewhat by negotiating an effective $12 million option to terminate the deal after one season if Ordonez is unable to play in a specified number of games during the upcoming season. The reason for that hedge is that Ordonez is coming off of knee surgery last season that led to the rare complication of bone marrow edema. A second surgery that was performed in Austria has reportedly cleared up that problem, but no one has even seen whether Ordonez can run at full speed at this point. Nevertheless, if Ordonez can limp through one season with the Tigers as a full-time player, the Tigers are on the hook to him for at least $75 million over the next five seasons.
Now, I like Ordonez as a player. I even thought it would be worth it for the Stros to take a flyer on him if they could have locked him up with a one year contract for say, $5-6 million with an option for $7 million. But what the Tigers have just committed to is, in a word, ludicrous.
Look, Ordonez had a very good five year run with the the White Sox (1999-2003) in which he developed power and the ability to draw a walk. His eight year career numbers (.307BA/.364OBA/.525SLG) are quite a bit better than Beltran’s seven year career numbers over the same period (.284/.353/.490).
However, the big difference between Ordonez and Beltran is that Ordonez did not become a starter until he was 26, so there is a high probability that his five year with the Sox was his peak performance period. Ordonez is now 31 and coming off of knee surgery, and even if he is able to return to playing everyday, the risk is huge that this contract will turn into a Bagwell-type albatross for the Tigers.
What on earth are the Tigers going to do if Ordonez fulfills his first year playing requirements and then becomes a .266/.377/.465 hitter like Bags was last season? In short, the Tigers would simply be using Ordonez’s contract to replace the absurdly overpriced contract that they gave to the then 30 year old Bobby Higginson in 2000, who proceeded to go downhill to the point where he provided the Tigers a pitiful .246/.353/.388 performance this past season. The Tigers are currently attempting to unload the $8.85 million that they currently owe Higginson under that contract.
Thus, as we ponder what could have been had the Stros been able to sign Beltran and elected to exercise their $9 million option on Jeff Kent, remember the Tigers. Sometimes the expensive deals that a club doesn’t make turn out to the ones that give young players such as Jason Lane and Chris Burke an opportunity to shine. As the past decade has shown us, it is far more likely that the Stros will be a better ballclub over the long haul by relying on development of such good talent within the organization than the Tigers will be throwing money at high risk contracts as those they gave Higginson and Ordonez.

Sizing up some Texas politicians

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In this post, James Wolcott endorses Kinky Friedman‘s candidacy for Texas governor because of Kinky’s stated reason for running — he wants “to move into the governor’s mansion because he needs more closet space.”
Among other observations, Mr. Wolcott describes the looming Republican Primary battle between Senator Kay Bailey Hutchison and current Texas governor Rick Perry:

It has been rumored that Senator Kay Bailey Thurston Howell the Third is planning to step down from the Senate to run for the governor’s seat, presently occupied by Rick Perry, whom even other Republicans consider a ceramic idiot. She would be a formidable candidate, unlike the current dolt.

Meanwhile, don’t miss Banjo Jones’ hilarious analysis of the lengths that Houston U.S. Representative and notorious camera hog Sheila Jackson Lee went to in order to obtain maximum camera time during President Bush’s State of the Union speech earlier this week.

Look who’s interested in Temple-Inland

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Austin-based Temple-Inland Inc. — the big lumber and financial services company — announced yesterday that one of Carl Icahn‘s investor vehicles — Icahn Partners Masters Fund LP — had requested government approval to buy as much as $1 billion of the company’s stock. The company’s stock price was up a cool 16% on the news. Here are several posts on what Mr. Icahn has been up to over the past year. Here is the Bloomberg News article on the development.

Landry’s makes Vegas play

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As predicted in this prior post, Houston-based Landry’s Restaurants Inc. announced yesterday that it is buying the Golden Nugget hotel-casino in downtown Las Vegas. The acquisition comes on the heels of a Landry’s junk bond offering last year amid speculation that the company was finalizing a strategy to attempt to add the potentially lucrative — but highly competitive — gambling business into its casual restaurant business.
Built almost 60 years ago, the Golden Nugget is the largest and probably the best of the 14 casinos in the troubled downtown area of Las Vegas, which has faded in recent years as numerous mega-casinos have been built in the Strip area of Vegas. The Nugget has just over 1,900 hotel rooms and employs over 2,500 employees.
Landry’s will pay Poster Financial Group Inc., the owners of the Golden Nugget, almost $300 million for the casino, including $140 million in cash and the assumption of approximately $155 million in debt.
Nevertheless, Landry’s may be picking up a bargain. Timothy Poster and Thomas Breitling — who were the founders of travel Web site Travelscape.com (later sold to Expedia) — are the owners of Poster Financial Group, which bought the Golden Nugget properties in downtown Vegas and Laughlin, Nevada from MGM Mirage Inc. in mid-2003 for $215 million. Poster Financial later later sold the Laughlin property for $31 million, but their operation of the Golden Nugget Las Vegas has not gone smoothly, as their dubious strategy of catering to high rollers resulted in a substantial drop in the casino’s “cash flow,” as the Vegas types say. Messrs. Poster and Breitling also decided to take part in the Fox reality television show, “The Casino,” which turned out to be a real turkey and was not good public relations for the casino. In short, it appears that Messrs. Poster and Breitling have had their fill of the gaming business for the time being.
The market responded favorably to the announcement, as Landry’s shares were up 12% to $31.95 on volume of 2.5 million shares yesterday afternoon on the New York Stock Exchange. Average daily volume in Landry’s shares is normally a tad over 300,000 shares.
Landry ‘s is a national restaurant company that owns and operates 300 restaurants, including Joe’s Crab Shack, Rainforest Cafe and Landry’s Seafood House. Landry’s CEO Tilman Fertitta, who founded the company and controls about a quarter of the company’s outstanding stock, is the cousin of the Fertitta family that runs Station Casinos Inc. Landry’s had about $1.1 billion in revenue during its most recently audited fiscal year and currently employs more than 30,000 people.

Markets and college sports

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Before moving to Houston 33 years ago, I was born and raised in Iowa City, Iowa where my late father was a longtime University of Iowa Medical School faculty member.
As with most young folks who grow up in Iowa City, I became immersed in the rather remarkable culture of the University of Iowa Hawkeye sports programs, particularly the football and basketball programs. From 1960 through 1971, I attended virtually every Iowa home football and basketball game. Although I have not found much of a market for my services in this area, I remain one of the relatively few experts on those Iowa programs from that era.
What brings all this up is an interesting situation that has been playing out with regard to the Hawkeye basketball team over the past week. Pierre Pierce, who has started something like 82 or 84 games during his three season career at Iowa, was dismissed from the team because of a squabble with a girlfriend that has resulted in a police investigation. Pierce has not been charged with a crime, but the probable reason that Pierce was dismissed from the team rather than suspended pending the outcome of the investigation is that he had been effectively suspended for a season (i.e., red-shirted for a season) a couple of years ago after copping a plea bargain in connection with aggravated sexual assault charges that had been leveled against him.
In this post, Professor Ribstein — from Hawkeye arch-rival, the University of Illinois — makes the point that markets were already making the UI athletic administration’s job somewhat easier in dismissing Pierce:

It must be tough to drop such a player. A team’s success has huge financial implications for a big-time sports school. But it is, still, a school, and discipline of misconduct is an important part of the educational mission. So there’s a conflict of interest at all management levels (not just the coach), because of conflicting criteria for judging their performance. This sounds to me a lot like the corporate social responsibility debate — profits vs. society.
But I’ve argued that markets sort out these conflicts in the corporate area, and markets seem to be working here, as many at Iowa were expressing displeasure with the school’s failure to act against Pierce.

Professor Ribstein is correct in his analysis, although it is just part of the story. Attendance at Hawkeye basketball games — which has been a tough ticket in Iowa for over 50 years — has diminished to the lowest levels in decades this season, despite the fact that the Hawkeye team is a Top 25 team and, as Professor Ribstein mentions in his post, took number one ranked and undefeated Illinois into overtime last week before losing a close game. As with most markets, a variety of factors is contributing to the declining attendance at Hawkeye basketball games, but no one who knows anything about the Hawkeye culture doubts for a second that the primary reason for the decline is many Hawkeye fans’ disdain for Pierce and his primary supporter, Hawkeye basketball coach Steve Alford. The fascinating element to this is that the Hawkeye fans’ disdain may be as much based on Coach Alford’s limitations in evaluating Pierce’s playing ability as it is on Pierce’s apparent character flaws.
Coach Alford was hired at Iowa six years ago with the promise that he was going to take the traditionally very good Iowa basketball program to the “elite” level of college basketball programs. Unfortunately for Coach Alford, the program has actually gone in the other direction during his tenure, and the latest chapter in the Pierce saga is probably going to be the straw that breaks the camel’s back in pushing the UI administration to buyout his contract and bring in a new coach.
Regardless of whether Coach Alford’s decision to support Pierce was based on alturistic “everyone is entitled to a second chance” principles or more grizzled “the team really needs him” principles, the market for Iowa basketball has firmly rejected Coach Alford’s decision. And interestingly, the market is at least partly rejecting Coach Alford’s competence as an evaluator of basketball talent because, as this excellent analysis points out, the reality is that Coach Alford overrated Pierce as a basketball player and Iowa’s team is likely not going to miss him much:

Pierre Pierce was clearly the focal point of Iowa’s offense through its first seven conference games. Since he scored in such an inefficient fashion, his absence in the offense probably won’t be the crisis some are making it out to be. The team going forward will be more balanced and made up of more efficient scorers, so they should be able to pick up the slack from the fallen star.

Stated simply, Pierce is like the .300 hitter in baseball whose on-base average is only .310 and whose slugging percentage is only .320. Because the non-experts in player evaluation believe that a .300 batting average equates with good hitting, the general public is deceived into thinking that the player is a good hitter despite the fact that the less well known but more important on base average and slugging percentage statistics reflect that the player is far below average. Pierce has a relatively high scoring average because he shoots frequently, but his poor shooting percentage and high turnover rate hurt the team more than his high scoring average contributes to it.
So, not only does the Pierce story intersect, as Professor Ribstein points out, the business of college sports and university corporate governance, it also points to the rather remarkable power of markets in effecting change in the entertainment business. The market for Hawkeye basketball recognizes that Coach Alford’s decision to make the overrated Pierce the focal point of the Hawkeye team reflects his limitations as a coach who will be able to fulfill the market’s expectation that the Iowa program remain at least the traditionally very good program that it has been over the past 50 years. That market is demanding a new (and hopefully better) coach, and it will likely get it.
Meanwhile, the market for Hawkeye football is quite strong as Hawkeye Coach Kirk Ferentz has just hauled in a top recruiting class on the heels of three straight major bowl appearances and Top Ten finishes. Interestingly, Coach Ferentz’s turnaround of the Hawkeye football program has been performed essentially by following the football model of the Super Bowl champion New England Patriots, which emphasizes teamwork and making no player the focal point of the team. Call it the “low risk with high upside” model of building a football program.
Yes, markets truly are in everything.

Beal Bank makes a big bet on Trump Hotels & Casino Resorts

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Look who has jumped into the debtor-in-possession lending business in connection with making a $36 million loan in the Trump Hotels & Casino Resorts chapter 11 case — Dallas-based Beal Bank and its poker-playin’ owner, Andrew Beal.
I guess that’s one way to increase one’s tab at the Trump Casinos.

Shell’s reserves continue to tumble

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Royal Dutch/Shell Group announced another sharp cut in its energy reserve estimate yesterday even as high energy prices allowed the company to generate a fourth-quarter profit of $4.48 billion. Here is a series of posts over the past year on the reserve estimate mess and related problems that Shell has been confronting.
Shell’s announcement highlighted a problem that is facing most of the major exploration and production companies — i.e., the struggle to find new reserves to replace the oil and gas that the companies are currently producing.
Shell’s problems in that area are are worst than most. Yesterday, the company reduced reserves by an additional 1.4 billion barrels of oil equivalent, the fifth such cut over the past year.
This brings the cumulative reserves reduction to about one-third of total company reserves since Shell first disclosed early last year that it had drastically overstated its reserves numbers. Moreover, Shell has not filed its required 2004 year-end reserves numbers with the U.S. Securities and Exchange Commission, so even further reductions are possible. Shell expects the five-year earnings impact of these cuts to total about $700 million, which is about 1% of the company’s profit over that period.
Despite that relatively small impact on profits, it is Shell’s dismal performance over the past year in replacing energy reserves that is placing the company in a precarious position within the industry. Reserves are the estimated bank of energy reserves that an oil and gas company has in the ground and energy companies typically attempt to replace at least 100% of the reserves they pump annually in order to provide markets with the confidence of future growth potential.
Shell is not even close to that standard. The company announced that it expected its 2004 reserve replacement ratio to be somewhere between 45% to 55%. Moreover, if one includes the effect of divestments and technical adjustments related to year-end oil pricing, the replacement rate plunges to a horrifying 15% to 25%.
Although not as drastic a problem as Shell’s, the entire oil and gas industry is having a difficult time replacing its energy reserves. Last week, Houston-based ConocoPhillips announced that it replaced just 60% to 65% of its reserves in 2004 and ChevronTexaco Corp. announced that its replacement rate will also be disappointing.