Monthly Archives: February 2009

Stanford blows up

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stanford Well, that certainly didn’t take long, now did it?

As noted here this past Sunday, R. Allen Stanford’s Stanford Financial Group has been well-known around Houston as a smoke-and-mirrors investment outfit for quite awhile. Joe Weisenthal over at Clusterstock has the best overview of Stanford’s collapse, while Felix Salmon does a good job of summarizing the SEC complaint and asking the right questions about the principals of the firm. The Chron’s Kristen Hays and Tom Fowler provide the local angle here.

Meanwhile, the Chronicle’s business columnist Loren Steffy bemoans the fact that government regulators — who have been investigating Stanford for at least the past four years — were again behind the knowledge curve in protecting investors from Stanford’s apparent investment fraud.

However, Steffy’s expectations are simply misplaced. A government regulatory body will rarely be as effective or efficient as the information marketplace in preventing or mitigating investment fraud loss. Had the investors in Stanford relied on Houston’s information market in deciding on whether to invest in the company, they wouldn’t have needed the "protection" of government regulation.

It’s tough following sports in Houston

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mike_hampton As noted earlier here, given all of the incredible disappointments over the years, there must be a special place in Heaven for folks who continue to follow Houston sports teams.

The latest example The Stros haven’t even held their first full team workout in Spring Training yet, but the news is already .  .  . well, .  . not so good.

First, Baseball Prospectus lists precisely one Stros farmhand — catcher Jason Castro — in its Top 100 baseball prospects, and Castro is no. 76 on that list. I guess that new "build from within" program is going to take some time.

Or course, this comes on the heels of an extremely quiet winter for the Stros, who didn’t make any major moves in a depressed free agent market. They aren’t admitting it, but Stros management apparently realizes that this club’s window for competing for a playoff spot is closed.

Although an improbable 36-18 second-half record allowed last season’s Stros to win 86 games and at least con some naive fans into thinking that they actually had a chance for the NL wild-card spot, Baseball Prospectus‘ PECOTA prediction system projects this season’s Stros to contend for the league’s worst team. PECOTA has the Stros topping the woeful Pirates by only one win, 65 to 64.

In view of that, it probably makes sense that the Stros spent most of the off-season cutting costs. In one of their key moves, the Stros withdrew a $27 million three-year offer to reasonably effective pitcher Randy Wolf in favor of a relatively cheap, one-year, $2 million deal with 36 year-old lefty Mike Hampton, who has pitched a total of 147 innings over the past four seasons.

Granted, that’s not much production over that stretch. But that means chances are he’ll break out and be more productive this season, right?

Well, so much for that theory.

Battier Finally, to put a punctuation mark on another dismal day of following Houston sports teams, I flicked on the car radio to a local sports talk show Monday afternoon while driving between meetings.

The two hosts and a caller were addressing Michael Lewis‘ NY Sunday Times Magazine article about Rockets forward Shane Battier.

In the article, Lewis provides an in-depth analysis of how the Rockets are on the cutting-edge of modifying traditional statistical analysis to find undervalued players such as Battier. It is clearly one of the most interesting, erudite, well-researched and important articles written about sports so far this year.

Despite that, Here is how the conversation went between the two sports talk radio hosts and their caller:

Caller: "Have you guys read the Michael Lewis article in the New York Times about Shane Battier and the Rockets?"

Host One: "I’ve heard about it, but I haven’t gotten around to reading it yet."

Host Two: "Oh yeah, I also heard about it, but I haven’t read it yet, either. What’s it all about?"

Caller: "Well, I haven’t read the article, either. I was hoping you guys had read it and could tell me about it."

Mercifully, I turned off the radio.

Chalk it up to just another episode in the continuing sordid story of following Houston sports teams.

What are Leach and IMG thinking?

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This earlier post noted the fascinating contract dispute that has arisen between Texas Tech University and the most successful coach in the school’s history, Mike Leach.

Now, with the university and Leach at loggerheads, and a university-imposed February 17th deadline looming to get a deal done on a proposed modification and extension of Leach’s contract, the real issue ought to be this — why has IMG, Leach’s agent in these negotiations, allowed the negotiations to reach impasse?

Well, it probably is not all IMG’s fault because Leach has a law degree and is likely highly-involved in the negotiations.

But one has to wonder about the judgment of the agent and the coach who would allow a five-year, $12.7 million contract go up in smoke over a few contractual details that simply should not be deal breakers.

To put this in perspective, the contract that Tech has offered Leach is one of most lucrative in big-time college football, almost certainly one of the top 10 or 15 contracts in terms of compensation.

What makes that all the more remarkable is that Tech — with a relatively modest athletic budget of a bit less than $50 million a year — is not close to being one of the most lucrative football programs in college football. By way of comparison, Texas’ annual athletic budget is over $100 million and Oklahoma’s is about $75 million.

In short, a distinct possibility exists that the eccentric Leach will never receive another offer as lucrative as Tech’s current one in his coaching career. How on earth is Leach — who is a good but not great coach — thumbing his nose at that kind of scratch?

In short, because IMG and Leach don’t like several contractual details of the university’s proposed contract.

For example, IMG and Leach want it to be relatively inexpensive for another program to swoop in and hire Leach away from Tech.

Not surprisingly, Tech wants it to be relatively expensive for another program — at least during the first three years of the new deal — to hire Leach away from Tech.

Similarly, Tech doesn’t want to have to pay an arm and a leg to buyout Leach’s contract if it wants to make a change, while IMG wants Tech to pay Leach a buyout equal to 40% of the remaining compensation due Leach under the contract at the time Tech elects to fire him.

The other two issues are so minor that they barely merit mentioning.

First, Tech wants Leach to pay a penalty of $1.5 million if he interviews with another school during the term of the contract without Tech’s consent. The other issue is that Tech wants to have any outside income that Leach arranges approved by Tech and run through the athletic department.

Having been involved in a few of these rodeos, here’s why I think IMG and Leach are foolish if they allow this potentially lucrative deal to evaporate on Tuesday.

First, it’s simply not unreasonable for Tech — which does not have a particularly wealthy football program — to hedge its risk of losing Leach to another program by requiring a substantial buyout of the contract.

The purpose of such a buyout is to allow Tech to mitigate its loss by using the buyout funds to hire a good coach to replace Leach. Moreover, the amount of Tech’s proposed buyout will not deter a bigger program that really wants Leach. IMG and Leach ought to recognize this reality, negotiate the least amount of buyout that they can, and move on.

The buyout of Leach is the toughest issue, but not all that difficult to resolve.

IMG’s 40% proposal, particularly during the early years of the contract, is unrealistic given the size of Tech’s resources, so they should come off those amounts.

On the other hand, Tech’s proposal for the buyout in the later years of the contract is relatively paltry, so Tech should come up considerably on those amounts. By both sides giving a bit in those areas, a deal can be reached.

The other two problem provisions are easily resolvable.

On the outside compensation issue, Tech has to regulate that income under NCAA regulations, so requiring Leach to obtain Tech’s approval is not an unusual or unreasonable demand.

Leach and Tech should simply agree that Tech will have the right to approve any such outside comp and that such approval will not be withheld unreasonably. For his part, Leach should agree that he will report and account to Tech for all such outside income so that Tech can comply with its obligations under NCAA regulations.

Finally, Tech would probably waive the proposed $1.5 million penalty if Leach would simply agree that he won’t interview for another job during the term of the contract without Tech’s approval, which Tech should agree would not be unreasonably withheld.

Then, if Leach were to do so anyway, Tech could elect to fire Leach for cause, which means that it wouldn’t have to pay him anything further under the contract. That would resolve that issue.

So, if the foregoing is all that it would take for Leach to become a multi-millionaire, then why are IMG and Leach thumbing their noses at Tech’s attractive offer?

The only answer I can come up with is that sometimes pride and emotion really can overwhelm good judgment during the heat of negotiations.

Having said that, I still think cooler heads prevail and a deal gets done. There is simply too much for Leach to lose by not doing so. Leach may be eccentric, but he is not stupid.

And IMG didn’t become the world’s most successful agents by recommending that their clients reject very lucrative contracts.

Houston’s Madoff?

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Stanford cover page The mainstream media has finally begun to notice the unusual circumstances surrounding R. Allen Stanford and his Houston-based investment firm, Stanford Financial Group (the latest Chronicle story is here).

Although the firm characterized the various investigations as "routine" in news reports, believe me — it’s never "routine" when the FBI starts nosing around. This is doubtful to end well for Stanford and its investors.

But what’s most remarkable about all this is how long it has taken for the media and regulators to catch on to Stanford. It took blogger Alex Dalmody less than 30 minutes to size up the situation, and it didn’t take Felix Salmon (update here) much longer.

Meanwhile, this Business Week article reports that the SEC has been investigating Stanford for the past three years!

Interestingly, I’ve asked dozens of folks in Houston investment community about Stanford over the years and have never once heard one vouch that an investment in the firm would be a good idea except as an absolute flyer. Nevertheless, I cannot recall even one media article over the years examining how Stanford was supposedly paying its lucrative returns to investors. Sure, the firm advertised well and contributed money to a number of powerful politicians. But I kept hearing from competent investment folks — exactly how is the firm paying those kinds of returns on CD’s again? And then there was that whole false association thing with the late Leland Stanford of Stanford University. How could anyone really take this outfit seriously?

Well, as recent news reports indicate, apparently about 30,000 investors did just that.

Now, it appears that many of these investors are from Central and South America, so maybe those investors didn’t have ready access to the information about Stanford that was available in Houston. But the important point here is that — as with Bernard Madoff — no regulatory agency is ever going to do a better job than the information market in preventing or mitigating fraud loss. I mean really, can you imagine how an investor who bought a Stanford CD during the past three years is feeling toward the SEC right now?

Thinking that the government can prevent a slick con man from fleecing investors is about as rational as investing one’s life savings with Stanford Financial Group.

An unintended consequence of drug prohibition

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Cocaine While this post from earlier in the week highlighted the historical backdrop to the United States’ failed drug prohibition policy, this Telegraph.co.uk article passes along an unintended consequence of that policy that should put to rest any concerns about reconsidering it:

The Home Office has admitted that the street price of both cocaine and heroin has fallen by nearly half in the last ten years, making the most dangerous illegal drugs cheaper than they have ever been.

That means a line of cocaine can cost as little as £1, with an average price per line of between £2 and £4.

The average price of a pint of lager is around £2.75, although some pub chains have reacted to the credit crunch by cutting the price of a pint as low as 99p. A glass of wine typically costs £3.50.  .  .  .

What Not to Wear, PGA Tour-style

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Mickelson Golf Digest fashion director Marty Hackel takes Phil Mickelson to task for wearing a white belt with his otherwise all-black oufit at the PGA Tour stop last weekend at Torrey Pines in San Diego:

OK, I have had a look at it and it’s not ideal. You are correct in that if you wear a white belt and have a big waist you should select trousers that have less contrast.

White belts are fine, but, and this is a big BUT, if your waist is big, DO NOT HAVE CONTRAST. The white belt with the black trousers called your eye and attention on his waist. Save the white belt for beige trousers and a white golf shirt!!

Golf Digest writer John Strege observes that Mickelsonís outfit might spur a new fashion rule:

One press tent wag suggested a Rule 32 apply, that if you’re older than 32 or have a waist size larger than 32 you should not wear a white belt.

Meanwhile, while enduring less encouraging news about professional athletes, take a moment to check out this nice story about PGA Tour veteran J.P. Hayes, who is finding a welcome market for sponsorís exemptions into Tour events after he disqualified himself over a technical rules violation during the PGA Tour Q-School last fall.

Sometimes, good guys really do win.

Interesting historical perspectives

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history mattersCato Unbound points us to a couple of articles that provide insightful observations on two of the crises that are swirling around us these days.

First, William Niskanen cautions us regarding the fear-mongering that supporters of the Obama Administration’s fiscal stimulus plan are using to justify emergency passage of the plan:

This is the fifth time in my adult life that the president has asked for or asserted unprecedented authority on an expedited basis with little or no congressional review. Each of the prior occasions turned out to be a disaster. [.  .  .]

The only coherence in this plan is political, not whether it is an effective or efficient method to stimulate the economy.   .   .  .  Again, as in the four prior episodes, there is every reason not to rush to approve a program of such magnitude.

The primary reason for the current financial crisis is that many banks cannot evaluate their own solvency or that of their current or potential counter-parties, primarily because of the difficulty of valuing mortgage-backed securities and other complex derivatives, and neither TARP nor the fiscal stimulus plan addresses this problem.

Our political system, unfortunately, is strongly biased to try to protect people against the effects of a crisis without addressing the causes of the crisis. To Congress: Slow down. Make sure you understand the causes of the financial crisis and the potential solutions before you burden your children and your grandchildren with another trillion dollars of federal debt.

Your present course is best described as fiscal child abuse.

Meanwhile, as Texans continue to watch nervously to the south as the Mexican government teeters on the brink of losing control of large sectors of the country to drug kingpins, Dale Gieringer reminds us that the main cause of this crisis — U.S. drug prohibition — is the result of dubious public policy:

This week marks the centennial of a fateful landmark in U.S. history, the nation’s first drug prohibition law.  On February 9, 1909, Congress passed the Opium Exclusion Act, barring the importation of opium for smoking as of April 1.  Thus began a hundred-year crusade that has unleashed unprecedented crime, violence and corruption around the world —a war with no victory in sight.

Long accustomed to federal drug control, most Americans are unaware that there was once a time when people were free to buy any drug, including opium, cocaine, and cannabis, at the pharmacy.  In that bygone era, drug-related crime and violence were largely unknown, and drug use was not a major public concern. [.  .  .]

Early 20th-century Americans would be astounded to see what a problem drugs have become since the establishment of drug prohibition. Every year, two million Americans are arrested and 400,000 imprisoned for drug offenses that did not exist in their time.  Drug laws are now the number-one source of crime in the U.S., with one-half of the entire adult population having violated them.

Long gone are the days when Americans were free to keep opium in their closet; today, even gravely suffering patients are denied pain-killing narcotics by their doctors out of fear of federal prosecution. While smoking opium has faded from the scene, the country is now rife with more potent and lethal narcotics, which are widely sold on the illegal market. 

Seen in retrospect, drug prohibition ranks as one of the great man-made disasters of the 20th century. .  .  .

The real A-Rod tragedy

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a-rod As predicted here last year, the names of the MLB players who tested positive for steroids or other performance-enhancing drug use in MLB’s 2003 survey test of 240 players are finally being leaked to the media (previous posts on PED use in sports are here).

That survey test was done under a deal between MLB and the MLB Players’ Association for the purpose of encouraging voluntary and confidential disclosure of PED use by players so that MLB and the Players’ Association could develop a productive program for helping the players get off the juice and monitor future use.

With the leaking of A-Rod’s name and the ensuing public outcry, so much for the notion of encouraging players to get help by assuring confidentiality.

Predictably, the mainstream media and much of the public are castigating Rodriguez, who is an easy target.

Of course, much of that same mainstream media and public contribute to the pathologically competitive MLB culture by regularly reveling in players who risk career-threatening disability by taking painkilling drugs so that they can play through injuries.

But players who used PED’s in in an effort to strengthen their bodies to avoid or minimize the inevitable injuries of the physically-brutal MLB season are pariahs. Go figure.

Meanwhile, the fact that MLB players have been using PED’s for at least the past two generations to enhance their performance is not even mentioned in the mind-numbingly superficial analysis of the PED issue that is being trotted out by most media outlets. Sure, Barry Bonds hit quite a few home runs during a time in which he was apparently using PED’s. But should Pete Rose be denied the record for breaking Ty Cobb’s total base hits standard simply because he used performance-enhancing amphetamines throughout his MLB career?

As noted here last year in connection with release of the Mitchell Commission report, witch hunts, investigations, criminal indictments, morality plays and public shaming episodes are not advancing a dispassionate debate regarding the complex issues that are at the heart of the use of PED’s in baseball and other sports. On a very basic level, it is not even clear that the controlled use of PED’s to enhance athletic performance is as dangerous to health as many of the sports in which the users compete.

A truly civilized society would find a better way to address these issues.

A couple of questions regarding the proposed soccer stadium

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dynamo-stadium-khou-above The always-entertaining Houston real estate blog, Swamplot, provided this post last week with typically pretty pictures from a KHOU-TV video of the long-proposed soccer stadium for the Houston Dynamo MLS soccer team.

Have we really been talking about this for almost two years now?

At any rate, now that the City of Houston and Harris County have committed a total of $25-30 million to the deal, and the City is on the hook for millions more in infrastructure improvements, Dynamo management is publicly representing that it is prepared to contribute another $80 million to build the stadium.

Now, I’m never seen the Dynamo’s financial statement, but my guess is that it generates between $10-15 million in revenues. Maybe that increases by 30-40% if the club gets its own stadium. A nice small business, but .  .  .

In these lean economic times, what bank is going to take the lead in loaning $80 million to a business that would have to dedicate a substantial amount of its revenue base just to pay debt service on the loan?

Is this a bankable deal? Or just pie-in-the-sky absent the local governments coughing up substantially more dough?

Inquiring minds want to know.