Monthly Archives: May 2007

Set up for failure

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tressel%20leading%20team.jpgA question for you. Who would establish a popular entertainment business along with a hundred or so partners and then doom it to fail for most of the partners?
Answer: The presidents of the university-members of the National Collegiate Athletic Association.
This Frank Fitzpatrick/Philadelphia Daily News article sums up the dire financial picture for most of the NCAA members:

Better than 90 percent of Division I athletic programs spend more than they earn, by an average of $7.1 million annually, according to figures released yesterday by NCAA researchers.
The statistics, for 2004-05, were included in a report urging the NCAA to standardize its procedures for collecting financial data, which was presented during a meeting of the Knight Commission, a college sports watchdog agency.
Only 22 of the 313 Division I athletic departments were self-supporting, the study noted. The rest required bailouts, either direct subsidies from their institutions or student fees, to balance their books. [. . .]
The report did not identify the 22 self-sustaining schools, though commission members indicated they were all among the college football superpowers. . .

This Brent Schrotenboer/San Diego Union-Tribune article analyzes the financial challenges faced by one of the have-nots in the world of minor league professional sports, San Diego State University:

While the current fiscal year doesn’t close until June 30, the athletic department again will receive about $2.8 million in ìone-timeî or ìauxiliaryî funding from other university sources to balance its budget of about $27 million.
The infusion is necessary despite a $160 annual student fee increase implemented in 2004 by SDSU President Stephen Weber, overriding a student referendum. That has added $4.8 million to $7 million to the athletic department coffers annually. An additional $5 million in athletics revenue comes from the state general fund. [. . .]
Most athletic departments at NCAA Division I-A schools are not profitable. But for more than a decade, SDSU has needed help at a higher rate than the national average for public schools.
. . . In the two most recent fiscal years, 42.7 percent of athletics revenue has come from student fees, the general fund and other university funding, according to audited financial statements. [. . .]
Before the season, SDSU projected football ticket revenue of $3 million but ended up with only $1.9 million, forcing tightening in other athletic department expenses this year. The year before, SDSU projected $2.5 million in football revenue and brought in $2.3 million. Meanwhile, the team hasn’t finished better than 6-6 since 1998.
This year, the SDSU athletic department has a projected budget shortfall of $100,000 to $250,000 ñ even after about $2.8 million in ìone-time fundingî was arranged from a university contract with a broadband communications company. . .

The SDSU athletic program finances are the same as most other major college programs, including the University of Houston and Rice University’s programs. As noted here over a couple of years ago and in more recent posts here and here, the present structure of big-time college football and basketball is corrupt, but certainly an entertaining form of corruption. The issue is whether the leaders of NCAA member institutions have the courage to restructure college athletics in a manner that reduces the incentives for corruption while retaining many of the salutory benefits of the enterprise. Inasmuch as history indicates that such reforms will not occur under the NCAA, could a rival concern — one that treats big-time college football and basketball as the minor league professional sports enterprises that they are — be a lucrative play for an entrepreneurial entertainment or media concern?

The Jenkens & Gilchrist post-mortem

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jenkens051807.gifThe Wall Street Journal’s Nathan Koppel has authored an excellent review (W$J article here) of the demise of Dallas-based Jenkens & Gilchrist (prior blog posts here), which shut down earlier this year after mass defections and an expensive settlement with the federal government. Koppel’s piece follows this earlier Dallas Morning News article that does a good job of chronicling the demise of the firm.
Given that the former leaders of the firm candidly admitted that the firm took big risks in the tax shelter business in order to generate increased profits, Larry Ribstein makes a typically insightful observation about how strict regulation of law firm structure may have contributed to the firm’s questionable risk-taking:

It is at least worth exploring whether freeing law firms from these constraints would produce more responsible firms. Jenkens is another reminder that it is folly to assume that such an innovation would besmirch some Platonic ideal of non-profit-oriented professionalism that law firms currently adhere to.

An interesting consequence of
criminalizing the right to counsel

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scales%20of%20justice051707.gifOne of the most egregious aspects of the federal government’s criminalization of business during the post-Enron era has been the prosecution tactic of threatening to go Arthur Andersen on companies if they fulfilled a corporate policy or obligation to pay the defense costs of the company’s business executives against whom the prosecution was pursuing criminal charges. U.S. District Judge Lewis Kaplan called the government in on the carpet for this tactic in the KPMG case, but the government got away with the tactic in a number of other cases with disastrous consequence for the individual defendants.
Once of those was the sad case of former Dynegy executive Jamie Olis in which the prosecution threatened Dynegy with indictment if the company followed its corporate policy of paying for Olis’ defense of a government’s indictment against him. As a result, Dynegy stiffed Olis for his defense costs and Olis — who is not a wealthy man — was forced to scrape together funds for what amounted to a skeletal defense at trial. Dynegy’s forced betrayal of Olis undoubtedly contributed to the disastrous result at trial as Olis was convicted and sentenced to over 24 years in prison. Much later, after the Fifth Circuit Court of Appeals overturned that abomination, Olis was resentenced to about six years in prison.
But now for the rest of the story. After Olis was convicted, Terry Yates, Olis’ trial counsel, filed a civil lawsuit against Dynegy seeking to recover damages in the amount that Dynegy should have paid him for Olis’ defense. The case went to trial in state district court in Houston earlier this month, but flew under the radar screen of the media. So, it was with great interest that I read the following short blurb in the Chronicle’s “Around the Region” column yesterday:

Jury wants Dynegy to pay lawyer
A jury said Tuesday that Dynegy owes $2.5 million in legal fees and damages to the lawyer of former Dynegy worker Jamie Olis.
The state court jury determined Dynegy committed fraud when it did not pay Terry Yates, Olis’ attorney during the November 2003 trial, for representing him during the trial. Olis was found guilty and sentenced to 24 years in prison but later had his sentence overturned and reduced to six years.
Yates was awarded $500,000 in legal fees and $2 million in damages.
A spokesman for Dynegy said the Houston-based energy company respects the jury’s verdict but is still considering its options, including an appeal.

The Reuters story on the jury verdict is here. Here’s hoping that Yates is able to obtain a judgment based on the jury verdict and collects every dime of the damages. I only wish that the government lawyers who strong-armed Dynegy into welching on the company’s obligation to defend Olis and deprived him of at least a fairer trial are the ones who would have to pay Yates.

There is no such thing as easy time

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prison051707.jpgOne of the most disturbing aspects of the federal government’s criminalization of business since 2001 has been the delight that many people in American society took in having various businesspeople hauled off to prison. The sociology of that reaction is complicated, but my anecdotal experience is that people who have either experienced prison themselves or have had a loved one imprisoned are far less likely to revel in such a fate for another.
Along those lines, this Luke Mullins/American.com article provides an excellent description of the desultory nature of life even in the best of America’s prisons. The willingness of many Americans to impose these conditions even where reasonable doubt exists that a crime has occurred — as well as the troubling trend in the U.S. to criminalize almost everything — is a disturbing development within our body politic.

Anadarko’s interesting investor

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anadarko.jpgWell, well, well. Look who has bought a big stake in The Woodlands-based Anadarko Petroleum Corporation:

Icahn Management LP, one of investor Carl Icahn’s investment vehicles, has purchased about 3.1 million shares in Anadarko Petroleum Corp., according to a Reuters report Tuesday.
The purchase amounts to a 0.7 percent stake in Anadarko, which has 463.9 million shares outstanding.
Reuters said regulatory filings stated that his ownership in The Woodlands-based Anadarko (NYSE: APC) was worth about $133.5 million as of March 31.

The always-entertaining Icahn lost out last year to Anadarko in the bidding over Kerr-McGee.

The Ensberg exit

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MorganEnsberg_P03.jpgI took in the first game of the Stros-Giants series last night, and it was probably the best game of the season to date. The Stros took a 3-0 lead, only to blow as the Giants went up 5-3, then the Stros’ rookie CF Hunter Pence tied it with a two-out, two-run yak that hit the left field foul pole in the bottom of the eighth, and LF Carlos Lee (who had two taters, two singles and a walk) finally won it for the Stros 6-5 with a walk-off moonshot in the bottom of the 10th.
Despite the excitement, however, I found myself feeling a bit sad for Stros 3B Morgan Ensberg, who struck out in a pinch hitting role. Ensberg is clearly on the trading block after a slow start to this season (-4 RCAA/.323/ OBA/.330 SLG/.653 OPS). 2B Chris Burke was recently sent to AAA Round Rock to play 2B as he prepares to replace Craig Biggio, hopefully as soon as possible after Bidg gets his 34 hits to attain the 3,000 hit level because that .306 OBA at the top of the lineup sure is getting ugly. Meanwhile, Brooks Conrad — the only remaining position player-farmhand at the high level of the Stros’ minor league system who has a legitimate shot at becoming a regular MLB player — has slid over to 3B at Round Rock in contemplation of getting a shot at that position with the Stros. Meanwhile, Mike Lamb (7/.455/.521/976) and Mark Loretta (4/.412/.403/.815) are currently getting the starts at 3B in place of Ensberg.
I can’t help but think that the Stros have mishandled Ensberg and that his career could have turned out quite differently had he been treated more fairly. Ensberg burst on the scene as a 27 year old rookie in 2003 (20/.377/.530/.907), but was inexplicably platooned by former Stros manager Jimy Williams at 3B with the notoriously unproductive Geoff Blum (-23/.295/.379/.674) in a move that probably cost the Stros a playoff spot that season (the Stros finished one game behind the Cubs for the NL Central title that season).
Laboring under the incompetent Williams during half of the 2004 season, Ensberg struggled that season (-12/.330/.411/.742) for his only truly subpar MLB season, but then rebounded in 2005 with his best season (39/.388/.557/.945), although he faded late that season after suffering a hand injury from a pitched ball. Ensberg took off like a rocket again in 2006 and looked like he was going to repeat his 2005 season, but he hurt his shoulder in early June and never really recovered, although his overall hitting statistics for the season were still well above-average (16/.396/.463/.858). In fact, Ensberg’s career numbers (55/.370/.478/.848) are much closer to that of the Stros’ $100 million man, Carlos Lee (80/.340/.496/.836), than Lee’s career numbers are to the Stros’ best position player, Lance Berkman (362/.417/.562/.978).
So, why are the Stros — a team bedeviled by poor hitting over much of this decade — getting rid of the club’s third or fourth best hitter? Yes, he is off to a poor start, but that happens to even great hitters sometimes (Berkman didn’t exactly light up the scoreboard during April this season, either). Ensberg’s decline in power since the shoulder injury last season is a legitimate concern, but are 125 plate appearances really enough to conclude that Ensberg is such damaged goods that the Stros should give up on their last homegrown position player to reach the majors before Pence?
Count me as skeptical. By the way, Ensberg’s replacement last night was Mike Lamb, whose career numbers (-18/.339/.426./765) are nowhere near as good as Ensberg’s. Lamb was 0 for 5 with two strikeouts.

Dubious Chronicle advertising

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chiropractic.jpgDavid Barron generally does good work for the Chronicle, particularly in reporting on media developments relating to professional sports and collegiate athletics. And this Barron piece in yesterday’s Chronicle about Waco chiropractor John Patterson’s work on various professional athletes is filled with all sorts of interesting anecdotes on the miraculous results of Patterson’s treatments on such professional athletes as Tracy McGrady, John Smoltz, Earl Campbell and former UT star pitcher and current Oakland A’s closer, Huston Street, among others.
But don’t you think that any reasonably objective newspaper article would at least mention the fact that there is substantial research (see also here) that has concluded that what Patterson is doing is quackery?
By the way, Street went on the disabled list yesterday with elbow tendonitis.

This boondoggle is getting personal

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JohnOQuinnRobertsonStadium_all.gifWell, at least the city’s proposed financing for this boondoggle is less than this one ($80 million versus $150 million plus who knows how much?).
But really. How many new and well-furnished high school football stadiums are located in the Houston area that would be more than acceptable for what amounts to minor league soccer? Half a dozen? At least the major league football and baseball teams could argue that the city’s facilities were no longer adequate when compared to other cities’ major league football and baseball stadiums. What is soccer’s reasoning? That the local governments financed stadiums for football, basketball and baseball, so it should do the same thing for soccer, too?
However, what really gripes me about all this is the proposed location for the soccer stadium — it’s smack dab in the middle of where I park for Stros games. ;^)

Ben Stein’s bad day

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ben_stein2.jpgNY Times business columnist Ben Stein has penned some real stinkers, but this past Sunday’s column may just be his worst yet.
First, Brad DeLong explains Stein’s basic misunderstanding of fundamental principles of unemployment and economic growth, and then observes of Stein’s confusion:

It’s a misconception like… like… like this: “Dear Dr. Gridlock: I took my foot off the accelerator three second ago. Why is the car still going 60? Why doesn’t the car instantaneously stop when I take my foot off the accelerator?”
So if only Ben Stein would stop calling himself an economist, it would brighten my day, so I pray for it.
Note that I no longer prayer for competent editors at the New York Times who would exercise even a little quality control. Of that I have despaired.

Then, Felix Salmon proceeds to eviscerate the remainder of Stein’s column, including Stein’s populist call for a WalMart in Midtown of New York City:

A Wal-Mart in Midtown? Maybe we could tear down Rockefeller Center and build one there. Or repurpose the Central Park Zoo as a big-box retailer; the Sheep Meadow could be the parking lot. Obviously we’d need to give Wal-Mart the space rent-free, or for maybe no more than a buck or two a foot, because that’s how the company can offer us its everyday low prices. But doing so would surely be worthwhile: “every New Yorker needs food and paper towels.” I only wonder how we’ve all managed to cope until now.

Finally, in regard to another topic that Stein has addressed in his column, the bidding competition for Houston-based freight logistics company EGL, Inc that was noted here last week continued over the past weekend:

The bidding war continues for EGL Inc.
Over the weekend, both EGL Chief Executive Officer James Crane and CEVA Group PLC, an affiliate of New York-based Apollo Management LP, upped the ante on their offers for the company. [. . .]
On May 11, Crane amended his offer to $45 per share in cash.
On May 12, CEVA countered with $46 per share in cash, and on May 13, EGL’s special committee determined that the revised proposal from the CEVA group was a superior proposal as defined in the merger agreement.
The committee has given Crane’s group until May 16 to make another offer.

EGL’s stock was trading at $29.76 a share when EGL chairman and CEO Jim Crane made his original management led, private equity-backed offer to take the company private. Sounds like a good deal for EGL shareholders, eh? Not according to Ben, who said the following about such buyouts in his Times column earlier this year:

[M]anagement buyouts are great for management. But by every standard I can see, they are yet another sad sign of how our corporate trustees have lost their moral compass. The time for them to stop is long overdue. If the stockholders have hired you and pay your wage to manage their assets, your job is to do that for themónot to buy them out at fire-sale prices and turn around and make billions that rightfully belong to them. The management buyout is a sad and infuriating avatar of a decadent age.

To which I commented at the time:

My anecdotal experience is that a good sign to hold on to one’s pocket book firmly is when someone tells you that it is better to have fewer bidders competing to purchase something. Indeed, my sense is that a management-led, private equity-financed play for a public company is usually just as likely to spur competing offers for the company as it is an attempt to lowball the public company’s shareholders. When the folks who know the most about a company’s business show that kind of confidence in the value of the company, that sends a strong signal to the market that more value can be made. Such confidence tends to be contagious.

Has there ever been a Times columnist as far out of their league as Stein?
Update: Don’t miss Larry Ribstein’s post regarding the Times editors’ decision to hire Stein, which includes this wry observation:

Is this why the Times needs a governance structure that insulates its managers from markets?

Appreciating the Stros

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royals_logo_092104-2.jpgThe Stros are not off to the best of starts this season. But if you are having trouble appreciating the local ballclub, take a moment to read this annual early May column of Kansas City sportswriter Joe Posnanski declaring the end of the Kansas City Royals’ season:

Well, sadly, yes, itís time once again for the annual, ìYouíve got to be kidding me, the baseball season is over already?î column. We wrote this column last year on May 5, so if thereís any consolation, at least this yearís version comes a week later.
Youíre right. Thereís no consolation.
We begin this installment by first offering a list of May Royals highlights over the last 10 years. Every Kansas City fan knows the Royals have been awful in April (.390 winning percentage in the last 10 years). What not everyone appreciates is they have been even worse in May (.384 winning percentage). This team has routinely dug a hole so deep in those first two months they actually play June games in China.
(Technically speaking ó according to my sixth-grade science teacher ó if you tried to dig a hole through the Earth, you would not end up in China. You would end up, well, technically speaking, youíd end up dead. So, letís not speak technically.)
May 23, 1998: Royals lose their eighth game in a row ó the lowlight of the streak being a three-game series sweep by the Cleveland Indians. In those three games, the Indians score 36 runs, the Royals score 10 ó it is the worst stomping the Royals had ever endured in a three-game series. ìIs it getting old, losing like this?î a reporter asks manager Tony Muser.
ìIt got old a long time ago,î Muser says.
May 11, 2000: The Royals are actually playing good baseball and need a win on this day to climb into a first-place tie. Instead, they lose a squeaker to Cleveland, 16-0. Itís the second-worst loss ever for the Royals. Clevelandís Manny Ramirez hits two home runs ó on one of them he broke his bat. The Royals ó thanks in large part to a dreadful bullpen, finish with a losing record despite having the highest-scoring offense in team history.
May 4, 2001: The Royals lose their fourth in a row, sparking Tony Muser to make his famous philosophical statement about the teamís lack of toughness: ìIíd like to see íem go out and pound tequila rather than cookies and milk,î Muser said. It is the beginning of the end, and almost exactly one year later Ö
May 1, 2002: It is actually at midnight ó so just as April turned to May ó that Royals general manager Allard Baird informs Tony Muser that he is being fired. Unfortunately, Muser had already been informed of his demise by reporters who knew about it two hours earlier. ìI wanted to do this the right way,î Baird would say later.
May 1, 2004: The Royals ó in a move so stunning you would swear it was from a rejected ìMajor Leagueî movie script ó decide to start a minor-leaguer nobody had ever heard of named Eduardo Villacis at Yankee Stadium against the New York Yankees. Shortly after Villacis is ripped to shreds, manager Tony PeÒa guarantees the Royals will win the division even though they are, at the time, in last place. ìWe are going to be unstoppable,î PeÒa says. The Royals end up losing 100 games, of course, and almost exactly a year later Ö
May 10, 2005: PeÒa resigns after another loss, the Royalsí eighth in nine days. ìItís tough to go to the ballpark and lose game after game,î PeÒa would say.
May 25, 2006: The Royals lose their 13th straight. Royals general manager Allard Baird has essentially been fired ó he knows it, everybody knows it ó but owner David Glass will not pull the trigger. One player says, ìThis team is some kind of circus, isnít it?î
So, thereís some May history for you. And now? Now the Royals are 11-26 ó 13 games back ó worst record in the American League. Theyíre hitting .244 as a team; theyíve also given up more hits than any team in the league. The Royals have been hit by more pitches than any team in the league, but theyíve hit opposing batters less than any team in the league. That tells a story right there.
The Royals lost Fridayís game when their young shortstop Tony PeÒa Jr. ó a defensive whiz ó let a double-play grounder go through his legs. They lost Thursdayís game when the pitching staff gave up a team record six homers to an Oakland Aís team that, up to that point, couldnít hit at all. They scored one run on Tuesday. On Sunday they were losing 13-0 at one point, in large part because Zack Greinke gave up three two-run homers in the same inning. The day before that, the bullpen blew a lead.
And so on.

Read the entire column. And then say a word of thanks for the Stros, who have had only one losing record in the past 15 seasons and have gone to the playoffs in 6 of the last 10.