Daily Archives: June 20, 2005

More on the City of Houston’s troubled hotel investments

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Magnolia.jpgAnne Linehan over at blogHouston.net alerts us to this Chronicle article that updates the situation facing the City of Houston in regard to its investment in two downtown Houston hotels, The Magnolia and the Crowne Plaza. This earlier post examined the City’s problem investments in the hotels, while this post addressed the soft market for hotel rooms in downtown Houston.
As Anne notes, not much has changed in regard to the situation since the prior report on the hotels’ financial problems. The hotels are still not generating enough revenue to service the City’s subordinated debt on the hotels, and it is not at all clear from the article that the hotels are even generating positive cash flow from operations exclusive of debt service. Thankfully, the City’s total investment in both hotels is under $15 million, which is a drop in the bucket compared to this other dubious investment.
Nevertheless, after throwing a few $15 millions around, you could be talking about some real money, so the City needs to address the situation responsibly. As noted in the earlier post, despite its notes on the properties, the City is really just a preferred equity investor in these hotels. Consequently, the main issue at this point is whether the hotels are being managed properly and whether there is a reasonable chance that they can generate enough revenue to break even from an operations standpoint. Assuming a “yes” answer to those two questions, then the City simply needs to look at these properties as long-term (make that very long-term) investments that need to be monitored as a part of its long-term investment portfolio. The hotels could also be productively used as poster children from time to time whenever some City official floats the idea that it is good economically for the City to loan money on a project that private financing will not support.
On the other hand, if either of the answers to the foregoing questions is “no,” that raises additional issues that a City government is institutionally incapable of handling well. In that event, some second or third buyer of one of these hotels might just be able to turn a profit on the City’s dime.

$60 a barrel oil

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oil_well.jpgOil prices surged almost 10% last week and are widely expected to top $60 a barrel this week. The recent price gains show a sharp turn in the short term market since only a month ago, when reports of steady growth in U.S. oil inventories drove oil down to $46.20 a barrel on May 20.
Meanwhile, even as short term oil prices escalated, the price of the December 2011 oil futures contracts fell, which increased what is referred to as the “backwardation” of oil prices — i.e., when futures prices are below current spot prices.
The mainstream media always seems to struggle with the economic implications of volatility in oil prices, so cruise over to this Econbrowser post, in which University of California at San Diego economics professor James D. Hamilton — an insightful specialist in oil price fluctuations — analyzes the current situation. This earlier post notes Mr. Hamilton’s views on why the current run-up in oil prices is unlike those that occurred during the 1970’s and early 80’s.
Finally, here is an excellent Forbes Magazine graph that shows the real and nominal price of oil over the past century and a half.

Updated roster of Supreme Court Justice candidates

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supreme court building.jpgFollowing on the NY Times list contained in this post from earlier this year, this Washington Post article reviews the likeliest pool of candidates that President Bush would draw from in nominating a new justice to replace any of the several elderly Justices who could retire in the near future from the U.S. Supreme Court.
The WaPo list is the same as the earlier NY Times list, except that the WaPo list includes Fifth Circuit Judge Emilio Garza as one of the candidates.
My personal favorite in this group remains John J. Roberts, who has been a clear thinker and superb writer while on the D.C. Court of Appeals.

The increasing criminalization of business

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marlon brando.jpgThis Wall Street Journal ($) article examines the increasing criminalization of business in the post-Enron era, which has been a frequent topic on this blog. Although the article does a reasonably good job of summarizing the troubling trend, it comes up somewhat short on analyzing the key implications of the trend, such as the disincentive to take risks resulting from regulating business through criminalization and the degradation of the rule of law resulting from the government’s overly broad application of criminal laws in its quest to convict business interests. For more analysis in that regard, review this thread of blog posts over the past year and a half.
The money quote in the article come from Joseph Grundfest (earlier post here), the Stanford University business law professor and former SEC commissioner who is currently researching the implications of the government’s growing power to bludgeon business interests into cooperating with a criminal investigation even if those business interests do not believe that they have done anything wrong:

“It’s a lot like the scene in ‘The Godfather’ where Marlon Brando explains how he’s going to make an offer they can’t refuse.”

Along those same lines, this WSJ ($) article reviews the prison sentences that have been and are expected to be handed down in the latest string of criminal prosecutions of business executives, while this article examines the unusual arrangement in which the Newark, N.J. U.S. Attorney has inserted himself into the management of Bristol-Myers Squibb Co.. The company’s board agreed to the arrangement in order to stave off a large fine stemming from a criminal investigation into an alleged $2.5 billion fraud at the company.
American International Group Inc.’s board should get ready for the same type of arrangement with the Lord of Regulation. And don’t miss Professor Ribstein’s cogent analysis of the situation, in which he notes the big difference between prosecuting agency costs — such as sloppy corporate controls over executive compensation — and prosecuting a more clear-cut crime where the thief robs the victim at gunpoint.
By the way, Professor Ribstein’s point about the arbitrary nature of prosecuting agency costs is perhaps best reflected by the irony that the key prosecution witness against Messrs. Kozlowski and Swartz — Tyco outside counsel David Boies — is simultaneously defending Maurice “Hank” Greenberg against Mr. Spitzer’s criminal assault on AIG’s agency costs.
It does all get quite confusing, doesn’t it?