I knew that Sammy Sosa had a bad season last year, at least by his standards. However, you know that it was a really bad season when it costs the owners of the club three cents a share.
A really bad season
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Monthly Archives: March 2005
Nervous times at Citgo HQ
This NY Times article reports on the concern in Houston business circles about Houston-based Citgo Petroleum Corp.’s status as the political football of choice for Hugo Ch·vez‘s Venezuelan government, which has controlled Citgo since government-owned PetrÛleos de Venezuela acquired a controlling interest in the company in 1990.
Basically, Mr. Ch·vez and his government have promoted popular sentiment in Venezuela against Citgo’s links to the United States while, at the same time, taking actions that indicate that the government is going to exercise greater control over the company. Citgo brands its name to over 14,000 independently owned gas stations in the U.S. and generates about 15 percent of the U.S. oil refining output.
About a month ago, Ch·vez fired Citgo’s chief executive Luis MarÌn and replaced him with Felix RodrÌguez, who is a senior executive at PetrÛleos de Venezuela and a political hack for Mr. Ch·vez. Then, last week, PetrÛleos de Venezuela purged the entire Citgo board of directors and replaced them with another group of Mr. Ch·vez’s political supporters.
Although the Times article tends to view the Venezuelan government’s control of Citgo as perilous to the U.S. energy market, I’m not buying it. Frankly, it is far more likely that Mr. Ch·vez and his government will make bad decisions regarding Citgo, which will present opportunities for its competitors.
Ebbers case goes to the jury
The “honest idiot” case goes to the jury today.
As an aside, it is always remarkable to me the amount of time that both the prosecution and the defense take in presenting closing arguments in these high profile criminal cases. Although the article on the closing arguments does not disclose the exact amounts of time expended, my sense is that both sides spent hours in front of the jury on closing argument. That is a dubious strategy, and one which tired jurors will often hold against a lawyer and his client. If a lawyer has not persuaded the jurors of the validity of the lawyer’s theory of the case by the time of closing argument, then spending hours on end attempting to drum it into them will more likely alienate the jury than anything else.
B of A settles in WorldCom class action
In two weeks, the trial cranks up of claims by investors and creditors who lost billions in the WorldCom accounting scandal against WorldCom’s former underwriters, outside directors, and Arthur Andersen. Consequently, over the next several weeks, there will probably be a series of “courthouse steps” settlements announced as the defendants in that litigation hedge their risk of a huge judgment for damages if they elect to go to trial. Yesterday, the first of such settlements was announced as Bank of America Corp. agreed to pay $460.5 million to settle the claims against it in the litigation.
The plaintiffs in the class action essentially allege that Bank of America and the other underwriters failed to conduct adequate due diligence in regard to about $17 billion of WorldCom bonds that were issued in the early part of this decade. Citigroup Inc. agreed to pay $2.65 billion to settle its portion of the lawsuit in May 2004. The Bank of America and Citigroup settlements increases the price of poker for the 14 other underwriters in the lawsuit, who now face the prospect of having to pay a larger share of damages if they risk taking the case to trial.
The Bank of America settlement increases the settlement pot in the WorldCom class action $3.04 billion. In comparison, the similar class action litigation involved in the Enron case has generated a settlement pot of only about $500 million to date. The Enron case remains mired in the discovery phase with a trial date currently scheduled for some time in mid-2006.
In its public statement announcing the deal, BofA denied violating any laws and added that it settled solely to hedge the risk of litigation. For their part, the plaintiffs’ representative in the lawsuit stated that Bank of America settled under the same formula used in the Citigroup settlement, which other underwriters protest because of their more limited role in WorldCom offerings. Under that settlement formula, J.P. Morgan — another underwriter defendant in the litigation — would have to pay about $1.3 billion in a settlement. Last year, J.P. Morgan set aside $2.3 billion of a $4.7 billion litigation reserve to cover the potential costs of litigation stemming from its role in arranging financing for Enron and for WorldCom.
Bank of America has been aggressive than most big underwriters in settling big class action claims over the past year. During that time, BofA has agreed to pay about more than $1 billion in settlements of various investment banking and trading claims. For example, in July 2004, BofA agreed to pay $70 million to settle claims against it in the Enron class action for its relatively limited role as an underwriter of various Enron deals. Similarly, earlier this year, the bank paid just south of $700 million in restitution, penalties, and reduction of fees consideration to settle various civil claims that it favored certain investors in engaging in “market timing”-trading and late trading of mutual funds.
A “just war” debate
On the heels of this earlier interview, don’t miss this Dartmouth Review article reporting on the recent “just war” debate between Professor Hanson and popular Dartmouth adjunct history professor Ronald Edsforth. Included in the article is this interesting report:
Edsforth proposed that the human race has learned the dangers of war, especially after the blood-soaked twentieth century. ?Evolution [of human behavior] is a fact,? he said. ?It didn?t stop back in ancient times? We are capable of learning as humans and changing our environment in such a way that that which we abhor is less and less likely.? . . . He proposed that the United States adopt a foreign policy for ?the twenty-first century, not the fifth century B.C., not the nineteenth century, not 1941.? The world sees ?war as a legacy of the imperialist era,? he added.
Hanson, though, maintained that the human race has not changed significantly in the past several thousand years. ?Human nature is set,? he said?it was ?primordial, reptilian,? adding that man is always ?governed by pride and fear and envy.? He cited Thucydides, who wrote that his works would remain valid through the ages precisely because human nature is unchanging. ?We have not reached the end of history.?
Whether human opinion changes is irrelevant to the question of human nature, Hanson said; . . .
At a question-and-answer session at the end of the debate, this view of human nature was the subject of much disdain by many members of the audience. One fellow questioned whether ?you and Homer and Thucydides two-thousand years ago? were cut out for modernity. Another asked Hanson when the war in Iraq would come to end??when will we reap the benefits of preemptive war???and wondered whether ?Pericles would have any advice for defeating suicide bombers in an urban environment.? Actually, Hanson retorted, the juxtaposition was poorly-chosen, as Peloponnesian War lasted for ?twenty-seven and a half years.?
During one of the lighter moments, Hanson jokingly observed that the Iraq war had made some unlikely allies. ?I never thought in my lifetime that Noam Chomsky and Pat Buchanan would have an alliance of convenience,? he said, smiling.
Bad Bankruptcy bill gets worse
One of the only good provisions of the bad Bankruptcy Reform legislation — the anti-forum shopping provision for business bankruptcies — was pulled out of the Senate bill yesterday in what appears to be a political deal between Texas Senator John Cornyn and Delaware Senator Joseph Biden to protect Texas’ liberal homestead exemption law and Delaware’s favored nation status for business bankruptcies.
This proposed legislation is the quintessential example of poorly-concieved special interest legislation. Outside of the credit card industry, there is no meaningful public support for these proposed reforms of the U.S. Bankruptcy Code, which is the preferred model for emerging countries to use in establishing their own insolvency and business reorganization systems. A radical overhaul of such a successful system is not only unnecessary, but unwise.
However, the credit card industry has contributed large amounts of cash to the campaign war chests of many Republican legislators, and the industry is now expecting a return on that investment in the form of this bad legislation. Remember that next time you are considering a vote for either Mr. Cornyn or Kay Bailey Hutchison, both of whom are supporting this abomination despite an extraordinary number of appeals to them from experts and professionals in the insolvency and reorganization field to do the right thing and reject this legislation.
Is DeLay vulnerable?
Probably not, but this Washington Post article notes sure signs that the DeLay camp is concerned.
Enron saga turns Grisham
This Weekend Advisor column in the Wall Street Journal ($) advises us that the market for books on the Enron scandal has not been all that great. The best book on the subject to date — Bethany McLean and Peter Elkind’s Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (Portfolio 2003) — has sold only 75,000 hardback copies, which is not a great showing considering the $1.4 million advance paid to the authors. Heck, that number indicates that only a small portion of the lawyers involved in the Enron case have bought the book.
At any rate, publishers — who never want to give up on an opportunity to hammer the Capitalist Roaders — have concluded that the lackluster sales in regard to Enron books is because of reader fatigue. That is, the Enron story has been around for so long that casual readers have become bored by it all and have moved on to other matters. That’s probably correct, although many of the previous media accounts of Enron have followed such a familiar script and lacked any real insight that even avid business scandal readers have become bored by it all.
Thus, Random House’s Broadway Books is going to try a new tactic in regard to the newest book on the Enron saga. On March 14, Broadway is releasing the long-awaited (at least by folks involved in the case) book on the Enron scandal by NY Times reporter Kurt Eichenwald, who has covered the Enron scandal from Day One. In so doing, the publisher hopes to break through the fog of Enron books by marketing Conspiracy of Fools to the John Grisham-novel crowd as a “true-crime thriller” rather than a business book. The name “Enron” appears no where on the book jacket and, although the book is nonfiction, the publishers hired well-known mystery novel editor Stacy Creamer to edit the book.
So, while publishers and other mainstream media types attempt to tell the Enron story in fashionable manner, the truly compelling human stories continue to be largely ignored — the sad case of Jamie Olis, the federal government blithely depriving thousands of innocent people their jobs by pursuing a dubious prosecution that put Arthur Andersen out of business, the “Justice” Department sledgehammering businesspeople into pleading guilty to questionable criminal charges out of fear of receiving of what amounts to a life sentence if they risk asserting their Constitutional right to a trial, or how the traditional form of corporate governance contributed to Enron’s collapse. Analysis of these more interesting, but admittedly harder, issues has been largely left to the world of blogs.
Nevertheless, Broadway is certainly bullish on the new book’s prospects. It has ordered 127,500 copies of the book and engineered a pre-release publicity campaign, which includes a desk drop of 1,000 copies to prominent CFOs and CEOs. Broadway’s release of 10,000 early copies of the book is the largest prerelease print of any Random House book since The Da Vinci Code.
By the way, Mr. Eichenwald’s last true-crime book — The Informant — is currently being made into a movie in which Matt Damon will play the mole who uncovers a price-fixing scheme at Archer-Daniels-Midland.
H’mm, Matt Damon as Andy Fastow? What do you think?
Victor Davis Hanson interviewed
The regulatory-induced syndrome of irrational exuberance
Temple University mathematics professor John Allen Paulos, author of Innumeracy (Hill 2001) and the more recent A Mathematician Plays the Stock Market (Basic 2003), wrote this insightful Wall Street Journal ($) op-ed yesterday in which he describes how even a bright mathematics professor who knows better can get caught up in the irrational exuberance of a stock bubble:
Bernie Ebbers’s testimony yesterday that he emphatically was not aware that his accountants were cooking WorldCom’s books while he was CEO brought back unpleasant memories of my disastrous “relationship” with the man. It began in 2000, when I received a small and totally unexpected sum of money. I considered it “mad money,” a term that, in retrospect, seems all too appropriate. Nothing distinguished the money from my other assets except this private designation, but being so classified made my modest windfall more vulnerable to whim. In this case it entrained a series of ill-fated, and much larger, investments in what WorldCom’s ads called “the pre-eminent global communications company for the digital generation.”
Professor Paulos goes on to explain how his limited research into WorldCom validated his interest in the stock, so he bought a few shares. And then:
After buying the initial shares, I found myself idly wondering, Why not buy more? I didn’t think of myself as a gambler, but I willed myself not to think, willed myself simply to act, willed myself to buy more shares of WCOM, shares that cost considerably more than the few I’d already bought. Usually a hard-headed fellow, I nevertheless succumbed to confirmation bias, looking disproportionately hard for what made my investment look good and essentially ignoring everything that made it look bad. This wasn’t difficult, given the stellar reports and strong buy recommendations that analysts kept bringing forth. In any case, I fell in love with the stock and saw every drop in its price as bringing about an even better buying opportunity. So-called averaging down (buying more shares when the price drops) is often indistinguishable from catching a falling knife, and in my case the result was thoroughly bloody hands.
Unfortunately, Professor Paulos found his initial bias toward the WorldCom stock hard to shake:
I’d grown tired of carrying on one-sided arguments with TV and online commentators as they delivered relentlessly bad news about WorldCom. So, in late fall 2001, some six months before its final swoon, I contacted a number of them and, having spent too much time in the immoderate atmosphere of WorldCom chatrooms, I chided them for their shortsightedness and exhorted them to look at the company differently.
Finally, out of frustration with the continued decline of WCOM stock, I even e-mailed Bernie Ebbers in early February 2002, suggesting that the company was not effectively stating its case and quixotically offering to help in any way that I could. WorldCom, I fatuously informed him, was well positioned, but dreadfully undervalued.
Even as I was writing them, I knew that sending these electronic epistles was absurd, but it gave me the temporary illusion of doing something about the free-falling stock. The realization that doing so had indeed been a no-brainer was glacially slow in arriving, and I didn’t dump it until April 2002, after it had lost almost all value. I gradually woke from this nightmarish infatuation with WorldCom to wonder how it had transformed me from a prudent investor in low-fee index funds into a monomaniacal speculator in a single dubious company.
Mr. Paulos concludes by answering his own question in the context of the ongoing sriminal trial of Mr. Ebbers:
Whatever the [Ebbers] trial’s outcome, however, I’ve long since come to a verdict on my behavior: guilty of stupidity in the first degree. No jail term, just a very substantial fine.
Yet, the ever-insightful Professor Ribstein notes in this post that attempting to deter this type of investor bravado through government regulation really just ensures that such irrational exuberance will eventually reappear:
A cause of the recent frauds is investors’ belief that they can outguess the market. Unfortunately, this erroneous belief is perpetuated and entrenched by court decisions and regulation that convey the impression that the markets are, again, safe for this foolish activity.
Quoting from a draft of his paper, Market v. Regulatory Responses to Corporate Fraud, 28 J. Corp. L. 1 (2002, Professor Ribstein observes:
Corporate frauds arguably were facilitated because there was too much investor confidence, as indicated by investors’ willingness to ignore what the market knew about questionable accounting and to not question firms’ extravagant claims about unproven business plans. Overselling regulation might perpetuate this misjudgment and mislead investors back into the same complacency that contributed to the recent frauds.