Check out A&M’s new indoor track facility
Reply
Monthly Archives: December 2008
Those pesky unexpected consequences
On the heels of this post from a couple of days ago that addressed Tyler Cowen’s recent NY Times op-ed that speculated that expectations generated from the 1998 government bailout of Long Term Capital Management hedge fund were not such a good thing, this W$J article on the Lehman Brothers bankruptcy case bemoans the enormous cost attributable to lack of reorganization planning in connection with the Lehman Brothers case:
As much as $75 billion of Lehman Brothers Holdings Inc. value was destroyed by the unplanned and chaotic form of the firm’s bankruptcy filing in September, according to an internal analysis by the company’s restructuring advisers.
A less-hurried Chapter 11 bankruptcy filing likely would have preserved tens of billions of dollars of value, according to a three-month study by the advisory firm, Alvarez & Marsal. An orderly filing would have enabled Lehman to sell some assets outside of federal bankruptcy-court protection, and would have given it time to try to unwind its derivatives portfolio in a way that might have preserved value, the study says. [. . .]
"While I have no position on whether or not the federal government should have provided further assistance to Lehman, once the decision was made not to provide further assistance, an orderly wind-down plan should have been pursued. It was an unconscionable waste of value," said Bryan Marsal, co-chief executive of the advisory firm who now serves as Lehman’s chief restructuring officer.
Mr. Marsal estimates that the total value destruction at Lehman will reach between $50 billion and $75 billion, once losses from derivatives trades and asset impairment are combined.
Losses are a natural part of the risk allocation that occurs in big reorganization cases. But anyone who has been involved in such cases knows that it takes at least a couple of months to prepare a big reorganization case properly.
Friends who are closely involved in the Lehman Brothers case have confided to me that Lehman CEO Richard Fuld never in his wildest imagination thought, after the precedent of Bear Stearns, that the Fed and the U.S. Treasury would fail to bail out Lehman Brothers. When that proved wrong, Lehman Brothers had to file its chapter 11 case on a relatively unplanned, emergency basis. That miscalculation cost creditors even more than they would have lost had Lehman’s management taken the normal step of planning the case when they saw the writing on the wall. I’ve got my doubts that the additional losses are $50-75 billion as suggested by the consultant’s report (could the Lehman-related parties be using that report as a liability shield?), but there is little question that an emergency bankruptcy filing generally costs creditors more than a properly planned one.
As John Carney notes, maybe the conventional wisdom is wrong that the Fed made matters worse by failing to bailout Lehman Brothers.
It’s hard enough to evaluate the risk of insolvency in regard to a trust-based business under normal circumstances. It becomes a real crapshoot when there exists an expectation that the federal government will provide stop-gap financing for a big trust-based company’s losses. And crapshoots generate some pretty bad risk-taking.
2008 Weekly local football review
(AP Photo/Dave Einsel; previous weekly reviews are here)
Well, at least this time, the Texans (8-8) beat the Bears’ (9-7) first-string rather than the Jags’ junior varsity to achieve only the franchise’s second non-losing season in seven NFL campaigns. The win also allowed the Texans to match my pre-season prediction for wins this season.
As usual, the Texans were led by their star WR Andre Johnson, who had 10 receptions for 148 yds and two TD’s. QB Matt Schaub finished 27-36 for 328 yards, the two TD’s to Johnson and, most importantly, no interceptions.
After the Bears jumped off to a 10-0 lead in a desultory first quarter, the Texans’ offense pretty well had its way with the Bears’ defense, rolling up 455 yds total offense. Surprisingly, after looking defenseless during the first quarter and losing stud DE Mario Williams to a pulled muscle for most of the second half, the Texans’ defense rebounded from the first quarter to hold the Bears to under 300 yds total offense.
So, another season, another 8-8 record for the Texans. There are definitely two ways to look at the Texans at this point in time.
On one hand, with another non-winning season, the Texans continue to be one of the least-successful new franchises in the history of the National Football League. Inasmuch as the team had a 7-9 record after its third year, one can make the case that not much progress has been made over the past four seasons. Yes, the offense is better, but the defense is arguably worse than it was after Year Three. Have the deck chairs simply been rearranged on the Titanic?
On the other hand, several signs indicate that the Texans are headed in the right direction. The offensive line and the receiving corps are far-improved and have more depth than at any time in franchise history. Schaub appears to have the talent necessary to become a consistently above-average NFL signal-caller. Rookie RB Steve Slaton is an excellent back who will only get better if the Texans can bring in another running back to take some of the load off of him in coming seasons.
Meanwhile, although the defense has not improved statistically from last season to this one, the Texans have a nucleus of good, young defensive players who should be able to gel into a reasonably formidable unit over the next several seasons.
What changes do the Texans need to make during the off-season? As I’ve noted several times during this season, the defense has not improved as much as it should have over the past two seasons based on the number of draft picks that the Texans have used on that unit. So, a case can be made that changes in the defensive coaching staff are justified.
However, what is the market going to be for defensive coaches during this off-season? It doesn’t make sense to make such a change and risk what could be gradual improvement in a young defensive unit that usually results from coaching staff continuity unless there is a reasonable probability that the new coaches will generate even more improvement.
Either way, as predicted before this season, the 2009 season is the one in which the Texans should emerge as a bona-fide playoff contender. If not, then owner Bob McNair will have harder decisions to make than merely whether to alter his defensive coaching staff.
Longhorns, Cougars and Owls
The Rice Owls (9-3) begin the local teams’ bowls season with the Texas Bowl at Reliant Stadium on Tuesday night (7 p.m., NFL Network) against Western Michigan (9-3).
The Houston Cougars (7-5) follow up on Wednesday afternoon (11 a.m., ESPN) in the Ft. Worth Bowl against Air Force (8-4).
And then the Texas Longhorns (11-1) take on Ohio State (10-2) a week from tonight, January 5th (7 p.m., Fox) in the Tostitos Fiesta Bowl in Phoenix.
Lessons of LTCM
Marginal Revolution’s Tyler Cowen makes a similar point in this NY Times op-ed about the 1998 federal bailout of the Long-Term Capital Management hedge fund that this earlier post made about Enron and the current Treasury bailout:
At the time, it may have seemed that regulators did the right thing [in bailing out LTM]. The bailout did not require upfront money from the government, and the world avoided an even bigger financial crisis.
Today, however, that ad hoc intervention by the government no longer looks so wise.
With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed — as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed. [ . . .]
The major creditors of the fund included Bear Stearns, Merrill Lynch and Lehman Brothers, all of which went on to lend and invest recklessly and, to one degree or another, pay the consequences. But 1998 should have been the time to send a credible warning that bad loans to over-leveraged institutions would mean losses, and that neither the Fed nor the Treasury would make these losses good.
Absent allocation of risk consequences to the parties who entered into transactions with financially-troubled companies, markets have a difficult time accurately pricing risk in regard to future investment and transactions. Such indecision plays a big part in delaying recovery in financial markets.
Similarly, without cleaning up the balance sheets of troubled companies (and putting the hopelessly insolvent ones out of their misery), extending additional credit to financially-strapped companies only makes them an even poorer risk for investment. That doesn’t facilitate recovery in the financial markets, either.
Amidst many blunders, the Bush Administration’s failure to tap corporate reorganization experts in connection with its policy-making regarding the financial crisis was one of the worst. Hopefully, Obama’s advisors note the mistake and correct it in the next Administration.
Update: Barry Ritholtz agrees with Tyler and me.
Are you ready for some football?
The football rivalry between the Texas Longhorns and Oklahoma Sooners is one of the most passionate in college football. The intensity of that rivalry has led to some highly competitive recruiting battles between the two schools for the best football talent in Texas over the years.
With that backdrop, the NY Times’ Thayer Evans ran this lengthy article on his bird’s-eye view of the recruiting fight between UT and OU over the services of blue-chip Lufkin High School defensive tackle, Jamarkus McFarland, who orally committed to OU on Christmas day.
McFarland and his mother cooperated with Evans closely over the past several months in helping him chronicle the twists and turns of the recruiting battle. The article does not paint a pretty picture of the recruiting process, particularly of UT’s efforts to land McFarland. NCAA investigations have been commenced over less.
However, the story doesn’t stop there. Turns out that Evans is an Oklahoma native and apparently a long-time OU fan (he also used to write for Sooners Illustrated). Evans has written extensively about OU’s football program over at the NY Times collegiate sports blog, the Quad, and almost always quite favorably. Neither Evans nor the Times disclosed any of this in connection with running the story on McFarland’s recruitment.
Meanwhile, Longhorn supporters are already poking some big holes in Evans’ story (see also here). And the NY Times continues to lose money hand-over-foot.
So it goes.
Hayes Carll is back
The Woodlands native Hayes Carll (earlier post here) is back in town for the holiday season, playing tonight in downtown Houston at Warehouse Live and on Tuesday the 30th at Dosey Doe in The Woodlands. If you have not had the pleasure of enjoying a live performance of this latest in a long-line of talented Texas singer-songwriters, then check out one of his shows this week. You will not be disappointed.
Merry Christmas from the Family
Back by popular demand is Texas singer-songwriter and Houston native Robert Earl Keen‘s classic Texas Christmas carol and video, Merry Christmas from the Family. Keen will be playing Houston’s House of Blues on Sunday the 28th.
Happy holidays and thanks for reading HCT!
Playing fair
So, now Alaska Senator Ted Stevens is finding out that some federal prosecutors do not play fair (H/T Doug Berman). Of course, we’ve known that for quite some time down here in Houston.
Oh well, at least the mainstream media has strong incentives to expose such abuses in the case of a major political figure.
But do the same media incentives exist in the prosecution of a wealthy and unpopular businessperson?
What if the reporter most responsible for such a prosecution is, might we say, not particularly motivated to expose prosecutorial abuses? Or what if the reporter for the nation’s most prominent business newspaper is so conflicted that he ignores the abuses even when they are playing out in front of him?
And the foregoing doesn’t even consider what we should think when one of those reporters in another case actively attempts to help investors score on their positions at the expense of a company and its chief executives.
It’s hard enough to maintain innocence against the overwhelming resources of the federal government when the prosecution plays fair. It’s next to impossible to do so when it doesn’t. What chance is there if the people responsible for exposing prosecutorial abuse have incentives that override that responsibility?
Ask Jeff Skilling.
Enduring Gladwell?
Charlie Rose interviews Malcolm Gladwell in the video below in regard to his new book Outliers, but it does not appear that the Financial Times’ Clive Cook will be watching:
Since the first chapter of “Tipping Point” I have been enduring Gladwell out of an increasingly weary sense of professional obligation. This is what they pay me to do, I tell myself. The man has a nose for interesting tales, I grant you, but his unfailing combination of intellectual parasitism, credulity, false modesty, and self-importance repels me. In “Tipping Point”, “Blink” and those of his New Yorker pieces I have read, the formula is always the same: find a scholarly opinion; sanctify said opinion with Gladwellian approval (transforming it from a disputed theory to something “we now know”); season with Madison Avenue terms of art; then deluge with anecdotes of questionable, if any, relevance. And let there be colour. Always, the colour. Please tell me about that man’s wry smile, interesting foreign accent, and cluttered desk (often, as studies show, the sign of a creative mind). I need to know all that.
2008 Weekly local football review
(AP Photo/George Nikitin; previous weekly reviews are here)
Amidst the Chronicle cheerleaders becoming enraptured again during the Texans’ (7-8) first four-game winning streak, the local team reminded us today against the Raiders (4-11) why they have been among the worst-performing new franchises in the history of the National Football League.
Basically, the Texans stunk. The progress that had been exhibited by the Texans’ defense over the past four games seemingly evaporated into thin air as the unit allowed the Raiders offense to do about anything it pleased. Minimal pressure on the passer combined with lax pass coverage and arm tackling is a pretty good prescription for a defeat in the NFL.
Meanwhile, the Texans’ offense looked as if it had never seen a two-deep zone pass defense. QB Matt Schaub’s poor passing statistics (19-36/234 yds/0 TD/1 INT) would have looked even worse but for WR David Anderson turning a short crossing route into a 65 yd reception late in the second quarter. Moreover, despite the Raiders loading up to stop the pass, the Texans’ offense was incapable of running the ball consistently against one of the worst run defenses in the NFL.
And, to make the Texans’ effort completely intolerable, the special teams allowed an 80-yard punt return for a TD late in the third quarter that — given the way the Texans’ offense was moving the ball — essentially put the game away for the Raiders.
However, the worst part about the Texans’ feeble effort against the Raiders is that — after a month-long reprieve during the the four-game winning streak — we’ll have to endure another week of Chronicle sportswriter John McClain doing his absurd impression of a crusty, old football coach disappointed with his team.
The Texans attempt to salvage a .500 season next Sunday at Reliant in the season finale against the Bears (9-6), who are still vying for a playoff spot. Given the Texans’ tepid improvement on defense over the past two seasons relative to the number of draft choices used on that unit over the past three drafts, my sense is that off-season changes will be made on the defensive coaching staff.