Monthly Archives: March 2005

Miss Manners nails it again

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I am a big fan of Judith Martin, who is the author of the Miss Manners column and various Miss Manners books. In today’s column, she addresses the following question:

Dear Miss Manners:
At an apartment-warming I attended, a couple arrived about 30 minutes into the party. Within seconds, the family dog began making love to the female guest’s leg. Her date grabbed her because she was struggling to stand.
The hostess said, “Down! Down!” The host said, “No, ‘Big Boy!’ No!” and tried to pull Big Boy off, without success. A nearby guest then leaned forward and gave the dog’s tail a single tug. The dog let out a yelp, dropped to his feet and began inspecting his rear.
The yelp brought the party to a halt. In the silence that followed, the hostess said, “Did you jerk my dog’s tail?” The tail-tugger turned red and looked ashamed, but said nothing. The moment passed and the party resumed.
Big Boy walked away. The tail-tugger did, too, in the opposite direction. The female guest later became pregnant, but not because of Big Boy. I don’t think anyone handled this well.
What do you think?
Miss Manners’ answer: That you had far too good a time at this party.

Meanwhile, over at AIG and Berkshire . . .

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Buffett image519387l.jpg And while the business and legal worlds focus on the implications of the Ebbers conviction, this NY Times article reports on the uneasiness at Berkshire Hathaway as New York Attorney General Eliot Spitzer carves another notch in his anti-business holster with the resignation of longtime American International Group chairman, Maurice “Hank” Greenberg, who is every bit as prominent in financial circles as Berkshire chairman Warren Buffett is in the investment field.
In striking contrast to Mr. Ebbers’ fate, this week’s “retirement” of AIG CEO Greenberg was the result of AIG’s board trying to soften the wrath of AG (i.e., “Aspiring Governor”) Spitzer. AIG remains one of the world’s largest and most lucrative financial services businesses. Mr. Spitzer was about to take Mr. Greenberg’s deposition in his ongoing investigation of transactions between AIG and Berkshire’s General Re Corp., so the AIG board unceremoniously elected to dump the man who had built the company into a giant in the hope of avoiding further legal scrutiny by the Aspiring Governor.
Greenberg image519387l.jpg What is unfortunate about all of this is that, in the current anti-business culture that is fostered by films, the MSM, and prosecutors such as Mr. Spitzer, the AIG Board’s throwing of Mr. Greenberg to the wolves just might have been the most reasonable business decision under the circumstances. In light of recent civil settlements by directors in the Enron and WorldCom cases, the main risk for directors now is failing to get rid of a CEO at the first sign of Mr. Spitzer or some other irregularity. Even if that that means showing the door to a CEO with Mr. Greenberg’s long record of great returns for shareholders, that’s just life in the big city.
Based on what is publicly known about Mr. Spitzer’s investigation into the AIG-General Re transaction, it would not be unreasonable for any CEO to run for cover out of fear that she is the next target of this voracious appetite to criminalize even normal business practices. If you believe Mr. Spitzer, Mr. Greenberg arranged a transaction in 2000 with General Re that made AIG’s reserves look slightly better than they really were. However, the deal did not affect AIG’s net income and was the type of transaction that AIG — and many other companies in the insurance industry — have done for years without any adverse market reaction, much less a criminal investigation.
Spitzer image519387l.jpg Nevertheless, as Mr. Spitzer continues pressing his campaign to criminalize business, it does not matter whether a transaction was considered proper in the past. Mr. Spitzer knows that he can get what he wants without the details of due process and a trial by undermining a company’s stock price in the media. Such an approach is contrary to the rule of law, but Mr. Spitzer proceeds with the warm understanding that no one in the MSM will ever call him out on the injustice of his ways.
Perhaps the Aspiring Governor will yet turn up something more damaging at AIG and Berkshire than what has been reported to date. But the AIG morality play is turning out about the same as other Spitzer investigations — a CEO gets canned, the company pays a big fine, and the Aspiring Governor gets good P.R. with perhaps a few crimes sprinkled in to titillate public interest in the matter. Although the dubious policy of criminalizing business generally is bad enough, Spitzer’s manipulation of huge companies by publicly attacking common business practices — without any measure of prosecutorial discretion or due process — is taking governmental regulation of business to an entirely new and more dangerous level.
Update: Don’t miss Professor Ribstein’s observations on the foregoing process, which he insightfully characterizes as the “Imperial Regulator and the Divine CEO.”

The “honest idiot” defense fails

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ebbers.promo.jpgBernie Ebbers’ honest idiot defense fails as he is convicted on all counts.
The conviction is further bad news for former Enron chairman Ken Lay and former CEO Jeff Skilling who are claiming — as did Mr. Ebbers — that former Enron CFO Andrew Fastow kept them in the dark regarding the dire implications that Mr. Fastow’s creation and management of several off-balance sheet partnerships had on Enron’s true financial condition.
In fact, in many respects, Messrs. Lay and Skilling’s defense is harder than Mr. Ebbers’ because both Lay and Skilling supported Fastow’s involvement in the off-balance sheet partnerships and their co-defendant — former Enron chief accountant Richard Causey — approved the dubious accounting relating to the partnerships. It is going to be risky for Messrs. Lay and Skilling to criticize Mr. Causey’s accounting for Fastow’s machinations with off-balance sheet entities during a trial in which all three are defendants. The bet here is that Mr. Causey cops a plea prior to trial and Messrs. Lay and Skilling end up defending the case between themselves. In that regard, Mr. Ebbers’ defense counsel — Reid Weingarten — is one of the lawyers on Mr. Causey’s defense team.
However, a key difference between the Ebbers theory of the case and that of Messrs. Lay and Skilling is that the latter two are not arguing that they were left in dark because of ignorance, but because of Mr. Fastow’s desire to hide the enormous income that he was making from managing the partnerships. Thus, where Mr. Ebbers was forced to argue that he simply did not understand WorldCom’s complicated accounting, Messrs. Lay and Skilling are contending that Mr. Fastow’s greed to generate huge income from Enron’s off-balance sheet partnerships incentivized him to lie to Lay and Skilling regarding the true nature of Enron’s off-balance sheet partnerships. Of course, a complicating fact in Messrs. Lay and Skilling’s defense is that they engineered the Enron board’s dubious approval of Fastow’s management of the partnerships, but that’s another issue.
Moreover, another difference between the Ebbers case and the case against Mr. Lay is that the government’s indictment against the three former Enron executives attributes a much larger role in the alleged crimes to Messrs. Skilling and Causey than to Mr. Lay. Messrs. Skilling and Causey are charged charged with crimes all the way back to 1999, and are identified as the men who “spearheaded” the purported conspiracy to hide Enron’s true financial condition from the marketplace. On the other hand, the charges against Mr. Lay are focused on his actions during the months following following Mr. Skilling’s resignation as CEO in August, 2001, when the government alleges that Lay “took over leadership of the conspiracy.”
This past weekend, Mr. Lay continued an unusual public relations campaign that he has mounted since his indictment in which he has claimed that he was ignorant of wrongdoing at Enron. During an interview on CBS’ 60 Minutes, Lay contended that Enron was a huge company in which senior management was delegated enormous trust to do the right thing. Mr. Lay contended that Mr. Fastow had “betrayed that trust” and “ultimately caused Enron’s collapse. To the extent that I did not know what he was doing, and he obviously didn’t share with me what he was doing, then indeed I cannot take responsibility for what he did.”
Similarly, although Mr. Skilling has not been spoken publicly since his indictment, he did raise eyebrows in legal circles by testifying before Congress in February 2002 in which he asserted that “while I was at Enron, I was not aware of any financing arrangements designed to conceal liabilities or inflate profitability.”

Oil price bubble?

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Traditionally, the NY Times views high energy prices as a failure of the government to regulate the oil barons properly. Thus, when the Times starts talking about a possible bubble in energy prices, take note.

Clear thinking regarding the IRA

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This Daily Telegraph op-ed addresses the long overdue disdain that is being heaped upon Gerry Adams, who is the leader of Sinn Fein, which is the Irish Republican Army‘s “political” wing, as the MSM tepidly refers to the group.
One of the more incongruous developments in the post-September 11 world has been the way in which Mr. Adams has been able to avoid scrutiny for his and his followers’ support of terroristic activities over the past 30 years. Despite this dubious background, this week is the first time since the mid-’90s that American political leaders will not welcome Mr. Adams with open arms in connection with traditional St. Patrick’s Day celebrations. Rather, President Bush will host the family members of the late Robert McCartney, the 33-year-old Northern Irish Catholic who was brutally killed outside a Belfast bar in January. Given the IRA’s mob-like control of certain local communities in Northern Ireland, none of the numerous witnesses to the McCartney murder — which include two Sinn Fein political candidates — have been willing to step up and identify the murderers.
Meanwhile, the IRA remains the prime suspect in the $50 million bank robbery that occurred in Belfast this past December just as British Prime Minister Tony Blair made a last ditch offer to restart the deadlocked Northern Ireland Assembly. That deadlock grows out of the 1998 Good Friday Agreement under which Mr. Blair agreed that the Assembly rules would require that operations be approved by parties such as Sinn Fein that represent only a small minority of the vote. After September 11, the Assembly increasingly appears to be a symbol of the failed policy of appeasement toward terroristic tactics.
As a result, the U.S., British and Irish governments are all finally on the verge of blowing off this failed policy toward dealing with the IRA and Sinn Fein. Inasmuch as Northern Ireland citizens — unlike the oppressed citizens of most Islamic countries — have always been fully represented in a democratic British government, one can only wonder why it has taken the governments this long to recognize the folly of appeasing the IRA and Sinn Fein.
The bottom line is that IRA is not a freedom movement of oppressed Catholics. Rather, it has evolved into a criminal enterprise that embraces a radical political agenda and cooperates with virtually every radical terrorist group, including radical Palestinian and Libyan factions. Over the past 35 years, the IRA has killed about 3,000 people, and has undertaken several assassination attempts on various British prime ministers.
Meanwhile, the IRA and Sinn Fein have for years secretly raised millions of dollars in contributions in the United States, and the groups have been allowed to raise contributions openly in the U.S. since President Clinton lifted the ban on the group in the mid-90’s. Politicians such as Massachusetts Senator Ted Kennedy (Democrat) and New York Congressman Peter King (Republican) have been among the IRA and Sinn Fein’s biggest American fundraisers.
In one of the more refreshing moves of the year, the Bush Administration has finally revoked the IRA and Sinn Fein’s license to raise funds openly in the U.S. this year, and even Messrs. Kennedy and King are shunning Mr. Adams during his visit to the States this year. However, keep watching this process carefully. Appeasement is almost always a more comfortable policy than confrontation for politicians to embrace, and organizations such as the IRA and Sinn Fein are masters at pushing the edge of the violence envelope under an appeasement policy. It does not make much sense for America to be fighting terroism that seeks to sustain radical Islamic fascism in the Middle East if it is unwilling to confront terrorism that seeks to undermine democratic government in our closest ally.

Getting a bit chippy during a deposition in Texas

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The following is a lively exchange at the end of a recent deposition in a Texas civil case:

Lawyer 1: “Mr. Lawyer 2, if you ever imply that I manufactured testimony again, I’ll fucking kick your ass. I’ll do it right here in front of all these attorneys, okay? Because we’re off the record. Did you hear what I said?”
Lawyer 2: [To the Court reporter] “Did you get that on the record?”
Lawyer 1: “No, it’s not on the record. I said ‘we’re off the record, end of deposition.'”
The Reporter: “You have to agree, per the Rules. I mean, that’s just my — I’m sorry.”
Lawyer 1: “That’s fine. Whatever.”

Here is the motion for sanctions resulting from this exchange.
Key litigation tip for Texas lawyers — don’t threaten to kick your opposing counsel’s ass during a deposition. However, if you do, it’s generally better to do so off the record. ;^)
Hat tip to Evan Schaeffer for the link to this instructive deposition exchange.

Breakfast of Champions at Texas Tech

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This press release from the U.S. Attorney for the Northern District of Texas reports on the fraud conviction of Aaron Shelley, the former “sports nutritionist” at Texas Tech University.
Turns out that Mr. Shelley had set up a scam operation to line his pockets in connection with obtaining nutritional supplements for the Texas Tech football team and eventually for other Texas Tech athletes. The press release states as follows:

Shelley conspired to and carried out two schemes to defraud Texas Tech University by over-billing the athletic department for nutritional supplements provided to athletes. The first scheme involved Shelley receiving kickback payments from Muscle Tech of Lubbock, a nutritional supplement store located in Lubbock, Texas. The later scheme involved Shelley over-billing through a “shell” corporation, Performance Edge, Inc. The fraudulent, over-billed amounts from both schemes totaled $497,145.19.

“Overbilled” by half a million bucks on “nutritional supplements?” No wonder those Tech receivers have looked so fast over the past several seasons. ;^)
Mr. Shelley received a sentence of 33 months in the slammer for the scheme. Hat tip to the White Collar Crime Prof for the link to the press release.

Refining ideas on health care finance

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David Cutler is a Harvard economist who was involved in the failed Clinton Administration initiative in the early 1990’s to reform America’s health care finance system. This NY Times Sunday Magazine article examines Professor Cutler’s evolving views on health care finance reform, and a number of them are quite interesting:

Cutler’s approach is radically different. He says that most health-care spending is actually good. Spending has been rising, he says, because it delivers positive, and measurable, economic value, and because it can do more things that Americans want. Therefore, Cutler says, we should focus on improving the quality of care rather than on reducing our consumption of it. Rather than pay less, he wants to pay more wisely — to encourage health-care providers to do more of what they should and less of what is wasteful.

A tweedy, self-effacing 39-year-old, Cutler is a seriously modified lefty. He envisions a system in which everyone could get insurance while free-market incentives would motivate health-care providers to be more effective as well as more efficient. Instead of suppressing the market by rationing care, restraining prices or regulating doctors, he wants to liberate it. It is neither Clinton nor Bush — but closer to Bill Bradley, whose 2000 campaign Cutler advised.

To make coverage universal, Cutler advocates a $6,000 credit for poor families (and less, on a sliding scale, for others, tapering off to a small credit for people earning $50,000 and up). The credits would be redeemable as a sort of health-insurance voucher. Significantly, Cutler would extend credits to everyone — even to people who are covered now. Many employers, for competitive reasons, would still offer coverage, but access to care would no longer depend on either employment status or age.

The problem is that most health care finance policy wonks believe that health care spending is “out of control” and, thus, Professor Cutler’s approach would make that spiral worse. However, the wonk solution — a single payor government system — simply creates even worse problems. Professor Cutler’s focus on the qualitative side of the problems is refreshing and merits serious consideration.
Finally, note that Professor Cutler’s ideas are similar in several ways to the ideas addressed in this previous post on business theorist Michael Porter‘s views on reforming the health care finance system.

CEO news

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After a couple of years of shareholder unrest over the direction of the Walt Disney Co., the company’s board yesterday named veteran Disney insider Robert Iger to replace Michael Eisner as the company’s CEO. Mr. Iger was Mr. Eisner’s choice to to succeed him. Here are the previous posts over the past year on the turmoil at Disney.
The theory behind the appointment of Mr. Iger is that he is best suited of all the candidates to continue Disney’s recent financial success because of his experience with the inner workings of the unique Disney culture. On the other hand, some Disney board members are still smarting over the choice of Mr. Iger over over outsider Meg Whitman, the eBay Inc. CEO who interviewed for the job a week ago but almost immediately withdrew her name from consideration because she felt the Disney board favored Mr. Iger.
Consequently, Mr. Iger’s selection is unlikely to bring immediate peace to the fractured Disney boardroom, in which dissident board members Roy E. Disney and Stanley Gold have already criticized Mr. Iger’s selection as being a sham orchestrated by by Disney Chairman George Mitchell.
Meanwhile, Eliot Spitzer is about to carve another notch in his belt as this NY Times article reports that Maurice R. “Hank” Greenberg, who turned American International Group Inc. into a financial services industry giant over the past generation, is planning to step down as chief executive amidst concern on the company’s board over investigations into certain of the company’s structured finance transactions with a Berkshire Hathaway insurance unit. Here is an earlier post on Mr. Spitzer’s investigation into AIG’s practices.
Mr. Greenberg’s imminent departure from AIG is a stunning reversal for the New York-based financial-services titan. Mr. Greenberg is one of America’s most successful CEO’s, and has personally transformed AIG over the past 40 years from an obscure property-casualty insurer into one of the world’s largest financial-services companies. Its market capitalization of almost $170 billion makes it one of the world’s most valuable companies, and Mr. Greenberg is one of the company’s largest individual shareholders.
Finally, President Bush on Friday picked John Hopkins University physicist Michael Griffin to lead the National Aeronautics and Space Administration to replace Sean O’Keefe, who left NASA earlier this year after three years in the top job to become chancellor of Louisiana State University. Dr. Griffin will become the space agency’s 11th administrator.
For the past year, Dr. Griffin has headed the space department at Johns Hopkins University’s Applied Physics Laboratory in Laurel, Md. It is the lab’s second-largest department and specializes in projects for both NASA and the military. Dr. Griffin has a fairly incredible academic background, which includes a Ph.D. in aerospace engineering and five master’s degrees — aerospace science, electrical engineering, applied physics, civil engineering and business administration. Before taking over the space department at Johns Hopkins, Dr. Griffin was president and chief operating officer of In-Q-Tel, a CIA-bankrolled venture-capital organization and, earlier in his career, Dr. Griffin worked at NASA as chief engineer and as deputy for technology at the Strategic Defense Initiative Organization.
Last year, Dr. Griffin was a part of a team of experts who recommended that NASA retire the space shuttle by 2010, send astronauts back to the moon by 2020, and then mounting human expeditions to Mars and beyond. The report recommended retiring the space shuttle in order to accelerate work on a spaceship that could carry astronauts to the international space station and ultimately to the moon.

First excerpt from “Conspiracy of Fools”

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This NY Sunday Times article provides the first excerpt from Kurt Eichenwald‘s new book about the collapse of Enron Corp. — Conspiracy of Fools — that was the subject of this earlier post.
The entire excerpt is well worth reading, but the following part of the excerpt is particularly interesting. It involves an Enron management crisis meeting in late October 2001 as public revelations of Enron’s off-balance sheet partnerships began making Enron’s bank creditors extremely nervous. At the outset of the meeting, Greg Whalley, Enron’s chief operating officer, fired Andrew Fastow as Enron’s chief financial officer and replaced him with Jeff McMahon, who Fastow had canned as Enron’s treasurer a year and a half earlier after McMahon had objected to then Enron CEO Jeff Skilling about Fastow’s conflict of interest in managing the partnerships:

The men made their way to a tiny conference room upstairs, crowding around an oblong table. Fifteen minutes later, Whalley blew into the room.

“O.K., let’s get going,” he said. “Let’s start with the organization first.”
Whalley shot a look at Fastow, pointing at him.
“Andy,” he said rapidly. “As we discussed, you’re no longer C.F.O., effective right now.”
Fastow’s face fell. “Wait …”
Ignoring Fastow, Whalley swept his arm across the table, pointing at [former Enron treasuerer Jeff] McMahon.
“Jeff, you’re now C.F.O.”

What was that? McMahon wasn’t sure he heard Whalley correctly.

“Excuse me?” McMahon said. “I’m C.F.O.?”
“Yes, you’re C.F.O.”

McMahon glanced across the table. Fastow was shaking his head, looking shocked. The moment was surreal.

“Wait a minute!” Fastow sputtered. “That was not my understanding of the deal!”
Whalley held up a hand. “Andy,” he said, “I don’t know the legal stuff. You get with Ken and work it out.”

That was it. Whalley turned away from Fastow.

Read the entire excerpt.