Monthly Archives: February 2009

The Price of Progress

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As noted here last fall, one of the key dynamics that is delaying the recovery of financial markets is the resistance of many societal forces to allow the markets to allocate the risk of loss among the various investors in failed businesses.

Inasmuch as private capital will not invest in even a potentially viable business until that company’s financial condition is likely to reward such an investment, the liquidation of unviable companies is an essential part of the process that has allowed market-based economies to generate the most wealth and jobs throughout modern history.

Despite the foregoing, the beneficial aspects of liquidating unprofitable businesses remains often unappreciated. A scene from the 1991 Norman Jewison film "Other’s People Money" illustrates this truth wonderfully, first as Gregory Peck’s character demonizes the forces of liquidation and then as Danny DeVito’s "Larry the Liquidator" shatters the myths upon which such demonizing rests. Enjoy.

He’s back

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Tiger Woods returned from major knee surgery to make his first appearance of the PGA Tour season this week, although Tim Clark made it a brief initial appearance.

Meanwhile, Woods’ major sponsor Nike rolled out this commercial to celebrate Woods’ return. It continues the trend of commercials representing some of the most creative product on television. Watch through the end and enjoy.

The Making of the Godfather

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the-godfather Don’t miss Mark Seal’s wonderful Vanity Fair piece on the making — and particularly the war over casting — of The Godfather:

With The Godfather, the era of the $100 million blockbuster had begun, and its creator was the last to know.

“I had been so conditioned to think the film was bad—too dark, too long, too boring—that I didn’t think it would have any success,” says Francis Ford Coppola.

“In fact, the reason I took the job to write [a screenplay for the 1974 remake of] The Great Gatsby was because I had no money and three kids and was sure I’d need the money. I heard about the success of The Godfather from my wife, who called me while I was writing Gatsby. I wasn’t even there."

"Masterpiece, ha! I was not even confident it would be a mild success.”

Greed in perspective

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In market economies, people who create jobs and wealth often generate great wealth personally. During periods of market unrest, those wealthy folks are often demonized as being greedy.

During a period of economic malaise in1979, the late Milton Friedman counsels Phil Donahue on the vacuity of demonizing greed. Enjoy.

Judge Kent cops a plea

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As most local lawyers expected, U.S. District Judge Sam Kent entered into a plea bargain on the courthouse steps today. The deal derailed what would have been an extremely ugly trial on sexual abuse and obstruction of justice charges, and ended Judge Kent’s 18-year career as a federal judge.

As noted, Judge Kent’s plea deal was not a surprise, although the courthouse steps nature of it was. It looks as if defense attorney Dick DeGuerin — one of Houston’s best criminal defense attorneys for this type of case — pushed the case to the brink in an attempt to gain the best possible deal, which it appears he did.

In the factual basis for the plea, Judge Kent admitted only to lying to the Fifth Circuit Judicial Council about unwanted sexual advances that he made toward a subordinate. That leaves out any admissions regarding the serious sexual abuse charges that the prosecution dismissed as a part of the plea deal. Those non-admissions have to be considered a victory for the defense in a case such as this.

Moreover, Judge Kent’s retirement will likely avoid impeachment. If so, then Judge Kent he will be able to collect his federal pension.

However, those victories probably won’t prevent Judge Kent from being sentenced to do some serious prison time. The prosecution agreed only not to recommend any more than a three-year sentence in regard to the maximum 20-year sentence that Judge Kent could receive on the obstruction charge, and visiting U.S. District Judge Roger Vinson has a reputation of handing down relatively harsh sentences. I’m no expert on sentencing, but my initial sense is that Judge Kent is looking at between a 3-5 year sentence.

That’s probably lighter than the sentence that Judge Kent would have assessed to a defendant convicted of the same charge in a similar case in his court.

But it’s not going to be a picnic, either.

The WSJ’s Myopia Regarding Prosecutorial Misconduct

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Bully for the Wall Street Journal for running this editorial last week decrying the prosecutorial misconduct of the Justice Department in obtaining the conviction of former Alaska Senator Ted Stevens on ethics charges (Mike over at the Crime and Federalism blog has posted a copy of the defense motion describing the prosecutorial misconduct here).

However, where was the nation’s leading business newspaper when even more egregious prosecutorial misconduct was involved in criminal cases that the DOJ brought in regard to Enron, particularly the prosecution of Jeff Skilling?

Could it be that the Journal was invested in the DOJ’s myth regarding Enron?

How ironic that the WSJ condemns prosecutorial misconduct with regard to the case against a politician, but largely ignores it in cases against businesspeople.

A civilized routine

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winston_churchill_01 Check out Winston Churchill’s entirely wonderful daily routine from the quite interesting blog, Daily Routines:

Despite all this activity Churchill’s daily routine changed little during these years. He awoke about 7:30 a.m. and remained in bed for a substantial breakfast and reading of mail and all the national newspapers. For the next couple of hours, still in bed, he worked, dictating to his secretaries.

At 11:00 a.m., he arose, bathed, and perhaps took a walk around the garden, and took a weak whisky and soda to his study.

At 1:00 p.m. he joined guests and family for a three-course lunch. Clementine drank claret, Winston champagne, preferable Pol Roger served at a specific temperature, port brandy and cigars. When lunch ended, about 3:30 p.m. he returned to his study to work, or supervised work on his estate, or played cards or backgammon with Clementine.

At 5:00 p.m., after another weak whisky and soda, he went to be for an hour and a half. He said this siesta, a habit gained in Cuba, allowed him to work 1 1/2 days in every 24 hours. At 6:30 p.m. he awoke, bathed again, and dressed for dinner at 8:00 p.m.

Dinner was the focal-point and highlight of Churchill’s day. Table talk, dominated by Churchill, was as important as the meal. Sometimes, depending on the company, drinks and cigars extended the event well past midnight. The guests retired, Churchill returned to his study for another hour or so of work.

Quotes of the Week

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quotesEmanuel Derman:

"The market wants Churchill and they keep tossing it Chamberlains."

John Nash (via David Henderson) on his progress out of mental illness in the late 1980’s:

"Then gradually I began to intellectually reject some of the delusionally influenced lines of thinking which had been characteristic of my orientation. This began, most recognizably, with the rejection of politically-oriented thinking as essentially a hopeless waste of intellectual effort."

Dick Armey:

"In reality, no one spends someone else’s money better than they spend their own. The charade of the current stimulus package, chockablock with earmarks to favored pet constituencies and virtually devoid of national policy considerations, is the logical consequence of Keynesianism in action. It is about politics and power, not sound economics, and I believe that the American people will reject it."

IMG’s bad week

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mark mccormack The late Mark McCormack must be spinning in his grave. His baby has had a very bad week.

McCormack was the attorney who parleyed his friendship with PGA Tour star Arnold Palmer to create the world’s leading management firm for professional athletes and celebrities, International Management Group, now known as IMG. In addition to Palmer, McCormack represented such icons as Jack Nicklaus, Tiger Woods, Margaret Thatcher, Mikhail Gorbachev and Pope John Paul II, to name just a few.

McCormack died in 2003 after suffering a major heart attack and his shares in IMG were sold in connection with the administration of his estate. With his death, the oversight of IMG passed on to a new generation of managers led by über-agent, Ted Forstmann.

Well, that new generation of managers just hit a serious bump in the road.

First, although a relatively small deal, IMG suffered a disproportionate amount of horrendous national publicity over its handling of the contract negotiations of eccentric but successful Texas Tech football coach, Mike Leach.

Not only did IMG alienate the decision-makers at Tech to the point that the university seriously considered firing Leach, IMG’s handling of the matter forced Leach to resolve the contract impasse himself in a face-to-face meeting with Tech’s chancellor yesterday afternoon. What is Leach paying IMG for, anyway?

At any rate, Leach’s resolution of the impasse over his contract at least saved IMG from facing the prospect of a $10 million-plus malpractice damage claim from Leach for fouling up the negotiations.

But it appears that IMG may not be as fortunate with regard to its relationship with the major business fraud of this week, Stanford Financial Group.

Check out this NY Post article (H/T Joe Weisenthal at Clusterstock):

The Post has learned that IMG quietly agreed to steer clients looking for investment advice to Stanford Financial Group, potentially exposing them to millions of dollars in losses resulting from the financial firm’s alleged fraud.

According to three sources with knowledge of the situation, IMG and Stanford have a quid-pro-quo agreement under which Stanford Financial pays IMG a low- to mid-seven-figure consulting fee in exchange for IMG advising its clients – which include golfers Tiger Woods, Arnold Palmer, David Toms, Sergio Garcia and others – to have their money managed by Stanford.

The backroom bargaining has exposed IMG to charges of double-dealing, and is raising questions about where the firm’s allegiances lay: with Stanford Financial or its athlete clients. [.  .  .]

IMG’s deal with Stanford Financial involved the management firm advising the now-tarnished financial firm on where to spend sponsorship money, particularly related to golf tournaments.

Stanford’s alleged fraud could cost IMG north of $10 million in fees, as well as any clients who got burned in the scandal.

For the time being, IMG is denying that it parked some of its clients’ funds at Stanford in return for Stanford hiring IMG as a consultant. But IMG’s denial raises as many questions as it answers, such as how did IMG’s clients find Stanford if IMG didn’t point them in that direction? You can rest assured that, if IMG was in fact consulting for Stanford while recommending that its clients invest money with the firm, IMG will probably just open up its pocketbook and reimburse those clients for any losses attributable to Stanford’s demise.

Any other approach to the Stanford problem would be an even bigger public relations fiasco than what IMG has suffered over the Leach-Tech contract negotiations.

Frankly, regardless of whether IMG had a consulting deal with Stanford, that IMG may have recommended that at least some of its clients invest funds with Stanford raises serious questions about the firm’s judgment. As noted earlier here, the Houston business community widely-knew for years that any investment in Stanford was an extremely risky bet.

IMG’s immediate and vehement denial of any conflict of interest in regard to Stanford and its other clients reflects that it is taking this problem seriously. We all know what happens when a trust-based business loses the trust of the market.