This could happen to you. Hat tip to Newmark’s Door for the link.
Pizza Armageddon
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Courting Failure
This may seem a bit odd coming on the heels of the previous post, but UCLA law professor Lynn LoPucki‘s long-awaited new book — Courting Failure : How Competition for Big Cases Is Corrupting the Bankruptcy Courts (UM Press 2005) — is finally available.
As noted in this earlier post, Professor LoPucki has been studying for many years the issue that he characterizes as the “race to the bottom” — i.e., bankruptcy courts in certain jurisdictions bending federal bankruptcy law to market themselves to debtors’ lawyers who often are instrumental in choosing the venue of big business reorganization cases.
The cost attributable to this “race to the bottom” is considerable because the two main bankruptcy venues — Delaware and the New York City — commonly approve professional fees in big reorganization cases that are at the highest level of the profession. In comparison, the high hourly rates being charged and routinely approved in the Enron reorganization case in New York would likely not have been approved if the case had been filed in Houston where Enron is based and which is a far more convenient venue for the vast majority of Enron creditors. In addition, Professor LoPucki argues in his new book that the “race to the bottom” has also caused a decline in the quality of bankruptcy reorganizations and a parallel rise in chapter 22’s (i.e., repeat reorganizations).
By the way, the bankruptcy reform legislation referred to in the previous post fails to address this “race to the bottom” issue. So it goes.
Bankruptcy reform legislation appears to be coming
The long legislative fight over bankruptcy reform legislation appears to be coming to a close, as this Washington Post article reports.
If you want to understand why this is poorly-conceived legislation that is a perfect example of Republican legislators indulging the narrow self-interest of certain business interests, then read this.
Although not perfect, America’s Bankruptcy Code and system is the best in the world, which is one of the reasons that it is often emulated. Making that system more expensive and difficult for individuals is contrary to the public policy of the fresh start and the promotion of risk taking that are the foundation of our insolvency laws.
Carly Fiorina’s Seven Deadly Sins
The best summary I have seen to date of why Carly Fiorina failed at Hewlett Packard is contained in this Rich Karlgaard op-ed today in the Wall Street Journal ($). Karlgaard, who is publisher of Forbes and author of Life 2.0 (Crown Business, 2004), notes Ms. Fiorina’s seven basic failures in managing HP:
1. Acting like a rock star. . . In the U.S., only entrepreneurs get to act as rock stars. Hired guns do not. . . We love our entrepreneur rock stars so much we let their sins slide. Carly was excoriated for a boneheaded move — giving Compaq shareholders 37% of HP’s profitable printer division in a swap for Compaq’s flagging PC business. Founder-CEOs are allowed to get away with far worse. . . Jobs’s first bold act after reassuming Apple’s reins in 1996 was to buy NeXT Software at an inflated $400 million and kill the company. Because he owned NeXT, Apple’s purchase made him rich. Yet Apple shareholders forgave Jobs because, well, he’s a rock star. And he has made good on that faith.
2. Failing to see the cheap revolution. . . . Dell is on the right side of the cheap revolution divide. It sells powerful servers for under $5,000 and keeps overhead low in Round Rock, Texas, where the average three-bedroom house sells for $200,000. HP sells servers for tens of thousands and keeps high overhead in Palo Alto, Calif., where the average three-bedroom sells for $1,500,000.
3. Failing to see the consumer revolution. A huge shift has occurred in the last five years. The coolest tech products now go straight into the consumer market. . . Carly has ineffectively maneuvered HP into this consumer field.
4. Obsession with size over flexibility. . . we need to go deeper and challenge the very premise of these mergers: that large scale is a requirement of success in the global economy. By merging with Compaq, Carly clearly believed this. But maybe the opposite is true — that speed and flexibility now trump scale.
5. Letting talent go. . . Aside from chasing away shareholder capital, she chased away talent, from Michael Capellas on down. For high-IQ tech companies, talent loss may be the greater sin. The most dynamic — Microsoft and Oracle during the ’80s and ’90s, and Google now — have always been obsessed with recruiting and keeping talent.
6. Not tolerating strength in others. . . the good [CEO’s] tolerate strength in others; the bad ones don’t. Gates has Steve Ballmer. Michael Dell has Kevin Rollins. Larry Ellison has Jeff Henley. Carly had no one like that.
7. Lack of focus. We conclude with Peter Drucker’s other great insight: Effective CEOs pick two tasks and devote their energies there. When those tasks are done, they don’t go to #3. They make a new list. One overlooked trick to maintaining focus, Drucker told me, is to cut travel. “Make your reports come to see you. Use technology, it’s cheaper than traveling. I don’t know anybody who can work while traveling. Do you?” Carly, globe-hopping in her Gulfstream, worked 100-hour weeks. But she was focused on too many tasks. Which is no focus at all.
Read the entire op-ed, and then think about how HP’s corporate governance promotes inflexible and ill-conceived management decisions such as those made by Ms. Fiorina. Professor Bainbridge also has some interesting observations on the big picture meaning of the HP Board’s action in terminating Ms. Fiorina’s employment.
On an anecdotal note, I am friends with several former Compaq executives who now work for HP in Houston. In discussing HP’s problems several months ago with one of my friends who is an HP sales exective, I asked him to sum up why he thought that HP was having so many problems integrating its various units into a cohesive whole. My friend’s reply was quick and authoritative:
“Because we are such a pain in the ass to deal with.”
By the way, my friend noted that he had passed that exact thought along personally to Ms. Fiorina on several occasions.
Kremlin tightens grip on oil and gas reserves
In a trend that has been developing over the past year in connection with the Russian government’s handling of Russian oil giant OAO Yukos, the Russian government announced Thursday that foreign-owned oil and gas companies will not allowed to bid at auctions this year for permits to develop several big Russian oilfields unless the companies have at least a 51% Russian-owned affiliate participate in the auctions. The new restrictions will further undermine Western investor confidence toward investing capital in the Russian oil and gas industry, which is already undergoing a sharp decline in growth.
Double-digit increases in prodution over the past several years has made Russian production one of the primary sources of additional supply that has offset rising demand from China and developing countries. However, production has now fallen for four straight months and it is widely expected that there will be an abrupt slowing in growth later this year.
The Kremlin’s additional restrictions on foreign investors also rebuffs the Bush Administration’s efforts to increase cooperation between Western oil and gas companies and the Russia government in the energy sector. The Administration held a summit conference earlier this month in which such business matters were discussed, but it appears that the Administration’s lobbying has gone over like a lead balloon with the Putin regime.
Meanwhile, in updating the Yukos case, U.S. Bankruptcy Judge Letitia Clark will hear arguments next Wednesday in Houston on a motion to dismiss the Yukos chapter 11 case that is currently pending in Houston.
Indicted Duke trader cops plea bargain
Brian Lavielle, one of three former Duke Energy Corp. natural gas traders who were indicted last April for booking phony trades to increase bonus compensation, pleaded guilty in Houston Thursday to falsifying books and agreed to cooperate in the federal prosecution of his other two co-defendants.
Lavielle, who is 34, faces a maximum sentence of twenty years and a fine of $5 million, although the cooperation deal and the recent Supreme Court rejection of mandatory federal sentencing guidelines probably mean that his sentence will be far less than the maximum. Sentencing is scheduled for December 9.
As noted in the previous post on the indictment, Lavielle and fellow Duke traders Timothy Kramer and Todd Reid were indicted for racketeering, conspiracy, wire and mail fraud, money laundering and falsifying corporate books in connection with booking phony electricity and natural-gas trades to boost trading volumes and inflate profits in a trading book that was the basis of their annual bonuses. The indictment alleges that the three rigged 400 phony trades that produced a $50 million profit in the trade book used for bonus calculations between March 2001 and May 2002. The schemes are alleged to have inflated bonuses for the three by a total of at least $7 million.
This is one of the first criminal cases of which I am aware in which senior-level executives have been accused of devising schemes to generate profits in a trading book by using “mark-to-market” accounting in calculating bonuses, on one hand, and to enter losses in an “accrual book” that had no bearing on bonuses, on the other. Duke and many other energy trades commonly used mark-to-market accounting to record profit and loss for energy contracts that might not settle for many years. However, mark to market accounting method has come under intense scrutiny since the demise of Enron Corp. in late 2001 because of the latitude that the method allows in recording profitable results in trading operations.
Latest Econoblog — Reform of health care finance
Don’t miss the latest segment (no subscription required for this series) in the Wall Street Journal’s Econoblog series, in which economist John Irons and George Mason University economics professor Russ Roberts discuss America’s broken health care finance system.
Posner on the new “Intelligence Czar” position
Several months ago, this post addressed Seventh Circuit Judge Richard Posner‘s criticism of the recommendations contained in the final report of the 9/11 Commission. In doing research on the 9/11 Commission report, Judge Posner decided to write a new book on intelligence reform, on which he is currently working.
In this NY Times op-ed, Judge Posner points out that the reason the Bush Administration is having trouble finding someone to fill the “Intelligence Czar” position that the Commission recommended is that the proposed position is ill-conceived and makes impossible demands:
The beguiling premise of the commission’s report was that the 9/11 attacks occurred because there wasn’t enough sharing of intelligence data among America’s 15 or so federal intelligence agencies. The report’s reassuring conclusion is that we can solve the problem by centralizing the control of the intelligence system. The premise is doubtful; only in hindsight do the scattered clues gathered in the summer of 2001 point to the attacks that took place.
And slotting in a new bureaucracy (the director is authorized a staff of 500) above the existing agencies will not increase information sharing. Instead, by adding a layer to the intelligence hierarchy, it will delay and diminish the flow of information to the president.
Read the entire op-ed. Key thought here — more centralization of information analysis does not equate with better analysis.
On Philip Johnson
Wall Street Journal architecture critic Ada Louise Huxtable writes this interesting op-ed ($) on the late Philip Johnson‘s career, in which she makes this interesting observation:
His fame made him the “signature architect” for corporate headquarters and commercial developers. The AT&T Building’s much-publicized “Chippendale” top put him on the cover of Time magazine, cradling the model in his arms. But his nimble intelligence and excellent eye failed to produce more than a pictorial pastiche that was flat and one-dimensional or a shallow sendup of the past. What was meant to be monumental was merely big and flaccid.
Whatever Philip Johnson’s legacy turns out to be, it will not rest on his buildings. His dedication to the art that was central to his existence, his proselytizing zeal for new work that pushes concept and practice beyond existing limits, his driving belief in architecture as the defining art of the present and the past, did much to re-establish a sense of the importance of the way we build in an age that worships the beauty of the bottom line. In his own way, perhaps he did change the world.
Class action bill nears Congressional approval
New class lawsuit legislation that will facilitate removal of most class actions from state to federal courts moved closer to Congressional approval yesterday as the Senate prepared to approve it. The House of Representatives has already committed to ratifying the bill so long as the Senate does not materially amend the legislation, and President Bush has already publicly stated that he will sign the legislation into law.
Under the legislation, most large class actions with aggregate claims of more than $5 million would be subject to removal to federal court, where most defense attorneys prefer defending class action cases.
A few exemptions remain that would allow primarily local controversies to remain in state court, such as cases in which at least two-thirds of the class members are from the state of the state court in which the class action is filed. A similar exemption exists for cases involving injuries that occurred primarily in one state.
The theory behind the legislation is to prevent class action plaintiffs’ lawyers from forum shopping class actions in the state courts to find the most “damages friendly” venue for such cases. However, class action plaintiffs’ lawyers have forum shopped class actions in federal courts for years, so the main impact of the legislation is simply to reduce the supply of available courts in which plaintiffs’ lawyers can initiate a such a lawsuit.
The rest of the political debate regarding the bill is largely partisan drivel.