Monthly Archives: August 2006

James Fallows – “We’ve won the War on Terror”

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War on Terror.jpgOne of the unfortunate results of the news regarding the latest foiled terrorist attack in London is that it will inevitably distract from a point that James Fallows (previous posts here) makes in this excellent Atlantic Monthly article — we’ve won the War on Terror.
In preparing the AM article, Fallows — who is of America’s most gifted investigative reporters on foreign policy and military issues — interviewed over 60 leading terrorism analysts and concludes that terrorists, through their own efforts, can damage, but not destroy us. Their real destructive power lies in what they can provoke us to do. Fallows goes on to observe that if we allow fear rather than reason to control our reaction to terrorism, then groups such as Al Qaeda can provoke the US into launching unnecessary wars that are far more damaging to our ultimate cause than the terrorist attack that provoked the war in the first place. Accordingly, Fallows urges in the article that the US drop the war metaphor in continuing its fight against groups such as Al Qaeda.
As we assess further information regarding the London airline terrorist plot, Fallows’ cogent optimism reminds us that fear is the fuel for demagogic threats to the freedom that we most cherish. Check it out.
Update: Stratfor echos Fallows’ optimism in his pre-London terrorist plot article with this post-plot analysis:

There are four takeaway lessons from this incident:
First, while there obviously remains a threat from those not only sympathetic to al Qaeda, but actually participating in planning with those in the al Qaeda apex leadership, their ability to launch successful attacks outside of the Middle East is severely degraded.
Second, if the cell truly does have 50 people and 21 have already been detained, then al Qaeda might have lost its ability to operate below the radar of Western — or at least U.K. — intelligence agencies. Al Qaeda’s defining characteristic has always been its ability to maintain operational security. If that has been compromised, then al Qaeda’s importance as a force has diminished greatly.
Third, though further attacks could occur, it appears al Qaeda has lost the ability to alter the political decision-making of its targets. The Sept. 11 attack changed the world. The Madrid train attacks changed a government. This failed airliner attack only succeeded in closing an airport temporarily.
Fourth, the vanguard of militant Islamism appears to have passed from Sunni/Wahhabi al Qaeda to Shiite Iran and Hezbollah. It is Iran that is shaping Western policies on the Middle East, and Hezbollah who is directly engaged with Israel. Al Qaeda, in contrast, appears unable to do significantly more than issue snazzy videos.

Will Wilkinson agrees and notes that the response in terms of airline security needs to be proportionate to the true risk.

Throw them all in the clink

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stock_options.jpgAs noted earlier here and here, the practice of backdating stock options is fundamentally a disclosure issue. However, that has not stopped federal prosecutors from criminalizing the practice as new indictments are now announced almost daily.
In this typically lucid post, Larry Ribstein wonders where this current spike in criminalizing a perhaps unfortunate but nevertheless common corporate practice will end:

The question is where to draw the line between criminal and civil liability for these violations. Are we going to throw a significant fraction of corporate America in jail? . . . backdating could become the Rubicon of criminalizing agency costs.[. . .]
The line-drawing problem becomes particularly clear in light of the news just yesterday that the vaunted Pixar apparently had its own backdating problem, and that one of the grants was to its guiding creative spirit, John Lasseter. So, again, how far are we going to go? Should we say that itís ok to jail the heretofore little known Kobi Alexander, but draw the line at the famous John Lasseter, or Steve Jobs, Pixarís co-founder and board chair?
Or is the key that Jobs himself didnít receive options but Alexander did? But, then, how distinguish Brocade, discussed in my first post on criminalizing backdating, where the indicted ceo apparently also did not gain?
Or is the distinction that the board may have authorized the options in Pixar, but the indicted Comverse agents apparently tricked their board? But the board apparently approved the Brocade options.
Also, the evidence of who did, and knew, what may get a little tricky. A member of the Comverse boardís compensation committee was Alexanderís sister. And note that a lot of this evidence of a coverup is based on affidavits by Comverse board members, who appointed the internal review committee.[ . . .]
In the Pixar case, the WSJ story implies but doesnít say that the board was in on the scheme. It notes that one compensation committee member was Jill Barad, former Mattel ceo, who also served on Microsoftís compensation committee while Microsoft was backdating. Another director was famed lawyer Larry Sonsini, who was also on the Brocade board and had long advised Apple and Jobs. . .
But what difference should it make whether the insiders fooled the board, and therefore the shareholders, or the board was in on the scheme? Is it, again, just that we donít want to send the likes of Barad and Sonsini to jail, but itís ok to catch the small fry? And can we be sure who was in on what?
Or should the key distinction as to criminalization be whether the insiders lied to the auditors, as may have happened in Comverse? If so, why is it worse to lie to the auditors than to your board?
This whole business of fixing responsibility within large organizations, or even not so large, is part of the problem of criminalizing agency costs. As Iíve said in my short paper The Perils of Criminalizing Agency Costs:

Disciplining agents also requires pinning responsibility for corporate failure on particular people in the organization. If someone should be criminally responsible for obscuring Enron’s financial condition, who should it be ñ the midlevel executives who designed the misleading structures, the executive officers who signed off on them, the independent directors who failed to object, the lawyers, accountants, banks and other executives who enabled them, anybody who knew about them and didnít speak up, the whistleblower who told only those within the organization, or all of the above?

Elsewhere on the criminalization of business front, the publicly-owned company BetOnSports — whose CEO David Carruthers was yanked off a plane while changing planes and arrested a couple of weeks ago (previous posts here) and which has provided a recreational service enjoyed by millions of Americans (online betting) — announced yesterday that it was shutting its operations down and “refocusing” its business on the Asian markets. The development represents the first time that I can recall that a publicly-traded company on the London Stock Exchange has shut down its operations under pressure from United States prosecutors.
So, what’s next? Shut down all the popular online Fantasy Football operations? That would be absurd, you say. Well, maybe not. At least the statistics don’t appear to be the property of the professional sports leagues.
Federal prosecutors assert that offshore Internet casinos such as BetOnSports violate the Federal Wire Act of 1961, but that legal theory is wholly untested except arguably in the area of sports betting. BetOnSports raised over $100 million when it went public on the London Exchange in July 2004 and its market cap immediately before the arrest of Carruthers was about $235 million. Some of the company’s largest institutional shareholders are funds controlled by major American investment houses, such as Goldman Sachs, Merrill Lynch and Morgan Stanley.
So, if BetOnSports is truly guilty of racketeering, then does that mean that Goldman Sachs, Merrill Lynch and Morgan Stanley are also criminally responsible for helping to finance that racketeering?
Don’t bet against it.
Update: Christine Hurt over at the Conglomerate provides these related insights into the enormous cost of prosecutorial overreaching.

Stros 2006 Review, Part Seven

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clemens following through2.jpgAs the Stros pass the 7/10’s pole and turn on to the stretch run of the 2006 National League regular season (previous 10% segment summaries are here), there is good news and bad news.
First, the good news. For the first time since the first 10% segment of the season, the Stros actually finished their most recent 10% segment — their seventh of the season — with a winning record.
The bad news is that the Stros’ record for that seventh segment (9-7) is not indicative of the type of rally that the this year’s club needs to become a realistic contender for the National League wild-card playoff berth for the third season in a row.
Nevertheless, the Stros continue to muddle along on the fringes of the NL playoff race. Due to the fact that there are not any really good NL teams this season except for the Mets, the 55-58 Stros remain only 3.5 games behind the Reds in the NL wild-card playoff race and only six games behind the slumping Cardinals in the NL Central race (the 59-55 Reds have pulled to within 2.5 games of the 61-52 Cards in that race). So, the Stros are still within striking distance in the NL wild-card race and could even contend for the NL Central lead if the Cards and Reds both collapse down the stretch. But that latter scenario is highly unlikely and even getting to 85 wins on the season — which will probably be the minimum wins necessary to win the wild-card playoff berth — would require that the Stros go 29-19 over the remainder of the season. Given the Stros’ traditionally strong pitching, that type of finish is certainly not impossible, but there has been little indication during this season to date that this particular Stros club is going to be able to pull it together sufficiently to make that kind of run.
As predicted in the previous post in this series, the return of Clemens (2.32 ERA/14 RSAA) and Brandon Backe (3.69 ERA/3 RSAA) — as well as the banishment of Buchholz (5.96 ERA/ -16 RSAA) and Rodriguez (5.22 ERA/-7 RSAA) to AAA Round Rock — has improved the Stros pitching staff’s aggregate runs saved against average (“RSAA,” explained here) to 32, which has vaulted the Stros to 6th from 13th among the 16 NL pitching staffs.
Unfortunately, despite the explosion in last night’s game, the Stros’ chronic hitting woes are diluting the effect of the pitching staff’s improvement on the overall club’s performance. After idling around National League-avereage in runs created against average (“RCAA,” explained here) for most of the season, the Stros hitting overall declined dramatically over the past 16-game segment, falling to an aggregate RCAA of -33, the lowest of the season to date and 12th among the NL clubs.

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Cheerleading for the Texans

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mouldscin.jpgAs regular as the sun rising, the Chronicle sports staff reverts to hometown cheerleaders during each pre-season training camp of the Houston Texans, chloroforming readers with puff pieces such as this Richard Justice column on new Texans wide-receiver, Eric Moulds.
For the first three seasons of the Texans, the training camp stories all lapped up the optimistic theme that the team was making steady progress behind the well-coordinated plan of owner Bob McNair, GM Charlie Casserly and head coach Dom Capers that had led the expansion team to the brink of being a playoff contender. Unfortunately, that theme fell rather flat last season as the bottom fell out for the Texans during a horrifying 2-14 season. It was rather comical to watch as Chronicle sportswriters John McClain and Justice went from fawning praise of the Texans during the pre-season to acerbic criticism just several weeks later during that awful season.
Given last year’s disastrous season, the Chronicle’s overall theme this pre-season is a bit different — the team has overhauled management and personnel, and the new, better-organized coaching staff and the new players who the Texans have brought in are moving the Texans in the right direction again. Maybe so, but there is no meaningful analysis in Justice’s column on Moulds that would lead an objective observor to conclude that the receiver is a significant upgrade over the seemingly serviceable Jabar Gaffney, the former Texans receiver who Moulds replaced.
Compare Justice’s fawning piece on Moulds with the following pre-season analysis by the folks at Football Prospectus, who base their evaluations of players primarily on objective criteria rather than subjective considerations:

Moulds has been an average receiver at best for several years now; even back in 2003, teammates such as Bobby Shaw outranked him in DPAR (“points above replacement-level player”). But the national media still considers Moulds an elite talent because the Bills throw him 150 passes per year, and he still has one or two 9-catch, 120-yard games each season, usually when the Bills are being beaten handily. The new Bills brain trust finally figured out that Moulds’ best years were behind him, and they did everythign but throw his cleats into a trash dumpster in their effort to get rid of him this spring. Moulds is a top candidate to fall off the map in 2006.

In short, based on objective criteria, Moulds’ decline in productivity has been masked by the fact that his former team threw to him frequently, albeit ineffectively. Thus, objective analysis suggests that the Texans overpaid for Moulds and that he will not be any better than a replacement-level player. Justice’s column might make you feel better about Moulds for awhile, but my sense is that most serious followers of the Texans and the NFL prefer the cold, hard facts to the type of subjective blather that the Chronicle regularly fees us during the Texans’ pre-season camp.
By the way, for current information on the Texans, check out the Chronicle’s new blog, Stephanie Stradley’s Texans Chick. Stephanie is an unabashed Texans’ fan, so she is unfailingly optimistic about the team and its players. However, she does pass along quite a bit interesting information and analysis on the Texans and its players that is not available from the Chronicle’s other sources. I recommend giving Stephanie’s blog a look.

What might have been

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carlos beltran points his fingers.jpgThis NY Times article checks in on Mets centerfielder, Carlos Beltran, who the Stros rented during their incredible second half drive to win a 2004 post-season berth and come within a game of their first World Series. Beltran had a disappointing, injury-plagued season last year (-2 RCAA/.330 OBA/.414 SLG/.744 OPS), his first as a Met, but he is making up for it this season (39/.384/.619/1.003) as the Mets are the favorite at this point to win the National League pennant.
Although Beltran is a wonderful talent, my sense still is that the Stros probably made the right move in not paying the $120 million over seven years that it would have taken to retain him after the 2004 season (see earlier posts here and here). Lance Berkman is only a year older than Beltran and has generated over 200 more RCAA than Beltran during their respective careers, so it would be hard to rationalize paying Berkman less than Beltran. That would tie up over $40 million in payroll for a long-term in two players, which the Stros learned was a tough pill to swallow during the declines of former sluggers Jeff Bagwell and Richard Hidalgo. Moreover, just to put it in the perspective of this season, even if Beltran were added to the Stros lineup, the club’s combined RCAA/RSAA numbers reflect that the Stros would still be behind the Cardinals and the Reds in the National League Central race, although they obviously would be closer than they are now and would have a better chance of overtaking those two clubs for a post-season berth.
Thus, even as good as Beltran is, I still like better the flexibility that the Stros will have after this season when about $40 million in payroll attributable to Bags, Pettitte, Clemens, etc. comes off the books. That should be enough to buy the 2-3 additional hitters that the club needs to turn around the downward trend in hitting that the Stros have experienced since the 2000 season.

Houston’s ambassador of learning

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lienhard.gifOne of the many people that make Houston such a remarkable place is John Lienhard, the longtime University of Houston engineering professor who is the author and voice of the popular KUHF radio series — Engines of our Ingenuity — which is carried across the nation by more than 40 National Public Radio affiliates. As Professor Lienhard describes it, Engines is “a mix of history, engineering and science. The programs describe the machines that make civilization run, and the people who devise them.”
Lienhard recently completed his 2,000th segment of Engines, so the Chronicle’s science writer Eric Berger used the occasion to interview Professor Lienhard. A part of the interview is here, and Eric’s podcast of the entire 30-minute interview is here. The following is Professor Lienhard’s response to Eric’s inquiry as to what he considers the greatest invention:

I don’t like to identify “greatest inventions.” I think inventions flow and swirl and intertwine with one another. There was a wonderful piece by Salman Rushdie where he described stories as flowing like different colors in a great sea, and what you do is dip in and pull out one of those stories. But they’re intermixed and intertwined with other stories. There’s the constant flow and ebb of stories, and the same is true of invention. And there’s another reason. In the book I finally say we’re in trouble when we talk about inventions. The airplane was not an invention. It was something else. I give it a word, multigenium. … They are these accrued inventions that we finally point out and say this is the final thing, like Wright Brothers’ airplane, or Morse’s telegraph, which followed something like 70 years of working with electric telegraphy. We call that thing in a finished form the invention, but it’s not an invention.

El Paso’s rebound

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elpaso.bmpJust a year of so ago, Houston-based El Paso Corp. looked as if it was a prime candidate to be the city’s next big corporate reorganization.
That’s not the case anymore. Earlier this week, El Paso announced that it had earned a $141 million profit in the second quarter on revenue of $1.21 billion. The natural gas pipeline company had a net loss of $246 million (38 cents a share) on $1.17 in revenues during the second quarter last year.
Good job, El Paso.

The WSJ gets it right on the BetOnSports case

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david-carruthers.jpgAfter being oddly slow in objecting to the prosecutorial abuses of businesspeople that have resulted in this, this and this (among many others), the Wall Street Journal ($) editorial page finally gets it right in this editorial on the outrageous conduct of the Justice Department in arresting BetOnSports executive David Carruthers while he changed planes in Dallas. Read the entire piece, but the conclusion sums up the outrage well:

. . . BetOnSports and Mr. Carruthers are not charged with dishonest behavior toward their customers. They are being told that a business they believed was legal was a criminal enterprise even if it was being run in the open. That suggests that prosecutors believe they have the right to enforce compliance with even ambiguous U.S. laws on any business, wherever based, solely because some of the people accessing their site happen to be Americans. As a legal theory, this is a stretch. But as an excuse to incarcerate a foreign national just passing through, it smacks of a politically opportunistic prosecution.

You just knew this was coming

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Magnolia2.jpgFollowing on posts here and here from last year regarding the City of Houston’s ill-advised investment in several downtown hotel properties, this Matt Stiles/Chronicle article reports that the City had decided to “restructure” (translated: Can you please pay us something?) $15 million in second lien loans on the Magnolia and the Crown Plaza hotels in downtown Houston rather than attempting to foreclose on the properties and deal with the messy business of attempting to eke out a profit from the two highly-leveraged properties in an overbuilt downtown hotel market.
As noted in this previous post, the Magnolia and Crowne Plaza are poster projects for why local governments should rarely get involved in financing projects that private financing sources will not support. In reality, the City is nothing more than a preferred equity investor in these highly-leveraged properties and, thus, its entire $15 million investment is at serious risk of being lost. That type of loss is not going to break the City of Houston finances, but the quality of the City’s investment decision should give one pause when considering the amount of money the City is throwing around in regard to these equally dubious investments.

The first salvo in the Bagwell disability claim lawsuit

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Bagwell waving.jpgConnecticut General Insurance Co. — the lead insurer on the Stros’ disability insurance policy on the best player in the history of the Houston Astros Baseball Club, Jeff Bagwell — has fired the first salvo in the Stros’ lawsuit against the insurer for its failure to pay the Stros’ claim under the policy resulting from Bagwell’s injured right shoulder. Previous posts on the issues relating to the disability insurance policy on Bagwell are here.
In this motion, Connecticut General requests that U.S. District Judge Keith Ellison sever the two extra-contractual claims from the Stros’ contractual claim that the Stros have asserted against the insurer in the lawsuit and abate the extra-contractual claims pending the disposition of the lawsuit over the contractual claim. The insurer points out that Bagwell’s play late last season during the Stros’ playoff drive and in the post-season raises a legitimate question as to whether Bagwell is totally disabled. Accordingly, Connecticut General argues that the Stros’ extra-contractual claims (which are a basis for greater damages against the insurer than breach of contract damages, which are fixed by the insurance policy) likely have no merit and that, even if those claims survive the breach of contract lawsuit, the insurer should not have to defend against those claims until after the dispassionate breach of contract claim is sorted out.
As one would expect, the Stros’ response (download link here) suggests that the circumstances surrounding Connecticut General’s denial of the club’s claim under the Bagwell disability insurance policy indicate a reasonable basis for the extra-contractual claims and, thus, that Judge Ellison should exercise his discretion to have a jury consider all of the claims in one efficient trial. Even if the Stros are successful in opposing Connecticut General’s motion to sever and abate the extra-contractual claims, this is likely not the last that the club will hear on this issue before trial. The insurer will probably request a summary judgment dismissing the entire lawsuit before trial, but almost certainly will request a partial summary judgment attempting to knock out the extra-contractual claims before trial. If Connecticut General is successful on that move, then the insurer would limit its risk of taking the case to trial to the contractual damages, which is a flyer that Connecticut General might just be willing to take.