Stros blow one

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The Stros wasted a fine pitching performance by Carlos Hernandez as Russ Springer was absolutely awful in relief as the Cards took the second game of this key three game series on Wednesday night at Busch Stadium in St. Louis, 4-2.
With the loss, the Stros fell two games behind the Giants in the Wild Card race and a 1 1/2 games behind the Cubs. At least the Marlins lost twice to the Expos.
Hernandez gave his best performance of the season, giving up only four hits and two runs in six innings. Simply a gutty performance from a pitcher who is still rehabbing from serious shoulder surgery. Springer, on the other hand, was awful in blowing the game in the eighth, giving up three hits, two runs, and throwing a two base wild pitch to boot. Not a great move by Manager Garner in pitching Springer for the second straight night.
After JK‘s two run yak in the second, the Stros offense was ineffectual. After the Pirates series last weekend, it’s not comforting watching the Stros struggle at the plate. Too much like most of the season and not enough like the great streak that got them back in the Wild Card race.
Brandon Backe goes for the Stros in the rubber game on Thursday night before the Stros return to the Juice Box for a quick weekender against the Brew Crew. The big Giants series at San Francisco looms next week.

Analyzing airline woes

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The Wall Street Journal’s Holman Jenkins, Jr.’s Business World ($) column today addresses the mess that is the American airline industry, and notes that this is not a problem that has just arisen recently:

Today’s crisis is not materially different from the airline crisis of the early 1990s, or the crisis of the early 1980s with the onset of deregulation.
Airlines have shown an ability to mint short-term profits in an economic bounceback when demand grows faster than they can lay on more jets and gates. But that’s not the same thing as being able to make profits consistently enough to pay back the capital invested in the industry. The airlines have never been able to do this, at least not since deregulation.
Kenneth Button, a professor at George Mason University and head of its transportation center, finds the same feature present in Europe’s increasingly deregulated market, an inability to price above cost. But before giving up on capitalism, airlines or both, perhaps we should look more closely at the problem.
Airlines are selling a highly perishable product, thus tempted to fill seats for any fare that will cover a bag of peanuts, several gallons of fuel and the cost of processing a booking. That means, when their competitive dander is up, airlines sell seats for a price far below their long-term costs. And competition is never in short supply — barriers to entry are low. Anyone can lease a couple of jets with no money down, sell tickets over the Internet and join the fray. Even if an airline fails, its lenders repossess the planes and find someone else to put them to work.
Airports, meanwhile, are local monopolies and, ahem, seldom leave money on the table for their airline customers. Ground services and catering also enjoy sufficient local market leverage to make money off the airlines even as the airlines can’t make money off their own customers. And the industry’s biggest suppliers of all, its own employees, demonstrably have the upper hand when it comes to divvying up the revenues of the business. Notice that workers at United and US Airways (both in bankruptcy) as well as at American, Northwest, Delta and Continental (each losing money and flirting with Chapter 11) still manage to hang on to wages substantially higher than those paid by the industry’s few profitmakers, such as JetBlue and Southwest.

If the cut-throat competition between carriers results in low fares, should we care? Mr. Jenkins suggests that we should:

Instability in the airline industry produces an irresistible urge for activity in politicians, who’ve already dumped $7 billion in taxpayer money on the airlines since 9/11.

Mr. Jenkins then goes on to suggest that consolidation of the industry would likely be helpful to consumers:

Airlines are not incompatible with capitalism so much as incompatible with modern antitrust policy, which assumes that “more competitors” is the same thing as “more efficiency.” That’s why, whenever the industry’s parlous finances start making news, carriers plop another “code-sharing” deal in front of regulators. These instruments of cooperation between competitors have the potential to blunt the industry’s urge to bleed itself to death during travel downturns. The latest embraces Delta, Northwestern and Continental and this week added foreign partners Air France, Alitalia, Aeromexico and Czech Airlines.
Don’t expect airlines to advertise their alliances thusly, but neither should passengers fret unduly. Fewer crazy fares might turn up on the Internet, but average fares would likely continue their long-run decline even if antitrusters wisely looked away for a while and let these experiments flower. The most notable outcome would be less financial chaos and less pressure on politicians to “fix” the airline problem in ways that make it worse.

Read the entire piece.
Meanwhile, in the latest example of the law of unintended consequences, this NY Times article reports on how the Air Transportation Stabilization Board — which Congress created to “save” the airlines after the 9/11 attacks — may decide to pull the plug on US Airways.

Stros keep pace

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Roger Clemens shut down the Cardinals’ potent hitters and then Brad Lidge came in to get the final out of the game after Darren Oliver and Dan Miceli almost screwed the pooch in the bottom the ninth as the Stros took the first game of their three gamer with the Cards in St. Louis on Tuesday night, 7-5.
Clemens won his 327th game with seven strong innings of five hit, one run pitching while improving to 3-0 with a 1.64 ERA in four starts against the Cardinals this year. He’s now tied with Roy O and the Marlins’ Carl Pavano for the National League lead in wins and is tied for the major league lead in winning percentage with the As’ Mark Mulder, who is also 17-4.
Lance Berkman had four hits, including a three-run double that highlighted the Stros’ five-run fourth. The Astros have won 15 of 18 and remained a game behind in the Wild Card race to the Giants, who beat the Brew Crew, and a half-game back of the Cubs, who beat the Pirates 3-2 in 12 innings. The Marlins also won to remain a game and a half back in the race.
Although Clemens was dominant through seven innings and Russ Springer pitched a scoreless eighth without any problem, Manager Phil Garner‘s effort to give the previously injured Oliver some game time experience for the first time in over a month almost blew up in his face in the ninth as Oliver gave up three hits and a walk before being relieved by Dan Miceli with two outs.
The Cards’ Cody McKay then greeted Miceli with a two-run double to make the score 7-4. Miceli induced a popup from the next hitter, but then shortstop Eric Bruntlett and third baseman Mike Lamb collided, letting the ball drop for an error and allowing McKay to score to make the score 7-5. Lidge entered with a runner on second and intentionally walked Pujols after falling behind in the count. The runners advanced to second and third on a wild pitch before Lidge struck out the final Card hitter to secure his 23rd save in 26 chances.
Whew! After that adventure, I don’t think Oliver is going to be seeing too many key relief roles down the stretch.
Carlos Hernandez pitches on Wednesday night as the Stros go for two in a row over the Cards. The Stros’ hitters better keep their crank hats on because seven runs will probably not be enough to win this one.

The pork barrel of “homeland security”

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UCLA School of Public Policy professor Amy Zegart is the author of “Flawed by Design” that examines the flawed national security process in the United States government. This earlier post on the 9/11 Commission hearings provided her astute insights into the problems that arise from failing to establish clear priorities in the intelligence gathering process.
In this Newsday op-ed, Professor Zegart — who had Condi Rice as her thesis adviser — examines how far we have come in terms fo homeland security since September 11, 2001, and she does not find the results encouraging:

Homeland security funds are flowing, but not to the right places. Since 9/11, Congress has distributed $13 billion to state governments with a formula only Washington could concoct: 40 percent was split evenly, regardless of a state’s population, targets or vulnerability to terrorist attack. The result: Safe places got safer. Rural states with fewer potential targets and low populations, such as Alaska and Wyoming, received more than $55 per resident. Target-rich and densely populated states like New York and California received $25 and $14 per person respectively. Osama bin Laden, beware: Wyoming is well fortified.
It gets worse. Over the past three years, the federal government has spent 20 times more on aviation security than on protecting America’s seaports, even though more than 90 percent of U.S. foreign trade moves by ship, but less than 5 percent of all shipping containers entering the country are inspected. One recent study showed the odds of detecting a nuclear bomb inside a heavy machinery container were close to zero. As the 9/11 Commission concluded, such a lopsided transportation strategy makes sense only if you intend to fight the last war.

And on the intelligence front — which is Professor Zegart’s area of expertise — the lack of progress is equally appalling:

Then there is our intelligence system, a dysfunctional family of agencies that have proven uniquely adept at resisting reform, getting the wrong information into the right hands and the right information into the wrong hands. The past three years have witnessed the two greatest intelligence failures since Pearl Harbor. Yet Bush has held no one accountable for these results, and has avoided leading the charge for reform.
The president grudgingly embraced one of the 9/11 Commission’s key recommendations – creating a national intelligence director with “full budgetary authority” – only under strong pressure and finally, last Wednesday, after opposing the idea for weeks. There is urgency and boldness for you.

Not only has Bush shown tepid support for the 9/11 Commission’s ideas, he seems to have none of his own. For instance: How can we fix the cultural pathologies that cripple our intelligence system? Bush has said nothing about this and the Commission identified the problem but left it to the national intelligence director to solve.

While Bush has placed the biggest burden on his own record in the campaign, it’s important to note that Kerry has offered only a lackluster alternative that can be summed up as, “I’m for whatever the 9/11 Commission says.” This is like a diner who orders the entire menu because there’s nothing he really wants except to avoid making a choice. The commission’s recommendations are good, but far from perfect.

And Ms. Zegart is not one to criticize without providing constructive proposals on how to improve intelligence gathering in the federal government:

Building new organizational arrangements with more people and more power will not make us safer if intelligence officials still view the world through the same old lenses and hoard information in the same old stovepipes.
The FBI, for example, faces a daunting cultural challenge: transforming a crime-fighting culture that prizes slow and careful evidence gathering after-the-fact into an intelligence culture that takes fast action to prevent future tragedies. Training programs are crucial to this effort. Today, however, counter-terrorism training constitutes only two weeks out of the 17-week required course for all new agents. That’s less time than agents get for vacation.
Then there is the unspoken 11th Commandment operating inside the CIA, FBI and the other 13 intelligence agencies: Thou Shalt Not Share. Here, too, the core problem is cultural – the reluctance to pass information across agency lines is deeply engrained, based more on habit and values than policy or organization charts. And here, too, training is key.
Creating a “one-team” approach to intelligence requires developing trust and building informal networks between officials in different agencies. This is best done by requiring cross-agency training programs early in officials’ careers. By current policies, however, most intelligence professionals can spend 20 years or more without a single community-wide training experience. Dots will always be hard to connect when intelligence agencies do not trust or understand each other.

Read the entire piece.

Justice Jefferson to be named Chief Justice of Texas Supreme Court

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Justice Wallace B. Jefferson of San Antonio, the first African American to serve on the Texas Supreme Court, will be named chief justice of the Court today by Governor Rick Perry.
Governor Perry appointed Justice Jefferson to the court in 2001, and he won election to the Court the next year. Justice Jefferson will replace former Chief Justice Tom Phillips, who resigned earlier this summer after serving on the court since 1987.
Justice Jefferson will lead the all-Republican Supreme Court during a tumultuous time. A coalition of school districts has challenged the constitutionality of the state’s school finance system, and a decision in that case is expected shortly from the state District Court in Travis County. No matter how that decision turns out, the decision will be appealed and the Supreme Court is expected to review it.
Governor Perry created somewhat of a stir earlier this year when he predicted to a crowd of supporters in Dallas that the Supreme Court would not force the Legislature to change the school finance system. At the time, Justice Jefferson publicly defended the Supreme Court as vigorously independent and stated that no justices spoke to Governor Perry about the case. Governor Perry later backed off his prediction and confirmed that he had not lobbied any Supreme Court justices on the matter.
Justice Jefferson grew up in San Antonio, the son of a hard-working military family that stressed education. He won a scholarship to an honors program at Michigan State University before attending the University of Texas Law School. After earning his law degree, he went into private practice in San Antonio, where he opened his own law firm in 1991.

Did TXU commit securities fraud?

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This Texas Observer article provides an interesting analysis on how Dallas-based TXU Corp dealt with the carnage in the energy industry resulting from the demise of Enron Corp.

2004 Weekly local football review

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Given the over-analysis of football that takes place in Texas, I am going to institute a brief review of each local team’s game from the past weekend with links to more thorough analysis:

Chargers 27 Texans 20. In their first game as a betting favorite, the Texans lay an egg as four turnovers (2 fumbles, 2 David Carr interceptions) undermine the Texans’ chances to pull out the win. The Chargers’ fourth year QB — Drew Brees from Austin — who the Chargers have been trying to get rid of since the end of last season, threw two TD passes to none for the third year QB Carr, who was the first pick in the 2001 draft. As noted earlier here, Carr has shown very little to date to indicate that he is a talent worthy of taking with the first pick of the NFL Draft. That he was outplayed by Brees in the first game of the season is telling.
Minnesota 35 Dallas 17. Vikes culpepper Pokes. Big Tuna will not be pleased.
Horns 22 Arkansas 20. A quality road win for the Horns, who received productive games from both QB Vincent Young and RB Ced Benson. UT’s defense looked improved over last season’s unit, as new defensive coaches Dick Tomey and Gregg Robinson appear to be making an impact. One major problem for the defense against Arkansas was a poor pass rush and containment, which better be fixed before the Horns tee it up in three weeks with OU in the Red River shootout. Offensively, it is still unclear to me whether UT can throw the ball well enough to force OU’s safeties to play safety rather than linebacker, which is essential if a team wants to beat the Sooners. Unfortunately, neither Rice nor Baylor — the Horns’ next two opponents before the OU game — will provide quality competition in which UT can develop that part of their offense.
Oklahoma 63 Houston 13. In a game that was not as close as the score indicates, the Cougars were in it all the way through the coin flip. In glancing at the Coogs’ schedule, it appears reasonably likely that UH will be 1-6 (Army appears to be the only likely win) by the end of October unless dramatic improvement occurs. Quite a comedown from Art Briles’ first season magic.
A&M 31 Wyoming 0. The Aggies take care of business against a patsy at home, which is an accomplishment for A&M the way they have been playing for the past couple of seasons. The Ags get a better test this Saturday night a home against a decent Clemson team, which is coming off a close loss to Georgia Tech.

Rice was idle this past Saturday. The Owls play the Run N’ Shoot Hawaii Warriors this Saturday at Rice Stadium. If Rice plays defense as well as they did against Houston’s junk offense a week ago, then the Owls could be 2-0 before becoming sacrificial lambs to Texas in Austin the following week.

For more information on Texas Tech, Baylor, and other Big 12 teams, Kevin Whited does a good weekly analysis of Big 12 games over at PubliusTx.Net.

Class Action Industrial Complex

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This Forbes article addresses a trend noted in these earlier posts — public pension funds becoming the lead plaintiffs in securities fraud litigation. And the public policy implications are not pretty:

And so it goes in the cozy confines of the class action racket. Plaintiff lawyers give handily to the politicians who hire them. They hire ex-insiders to woo pension funds, fete clients at cushy conferences and pay referral fees to powerbrokers who hook them up with new pension plaintiffs. None of this is illegal per se; nor does it violate existing rules of legal ethics. But even some lawyers have problems with it.
“This is corruption on a grand scale,” says class action lawyer Howard Sirota of New York, who says payola by his rivals may force him out of the game. Contributing cash to the officials who oversee your business “is illegal in municipal finance. The American Bar Association [discourages] it. A grand jury is investigating it (see Forbes, Feb. 16). And absolutely nothing happens,” Sirota says.
Last year plaintiff shareholders won $3 billion in class actions against the companies they had invested in, says Institutional Shareholder Services. (Let’s ignore, for now, that often they drain money from companies in which they still hold a stake; see box on this page.) The take was distributed in small chunks to thousands upon thousands of recipients. But $800 million of it will go to a small circle of very lucky people: securities plaintiff lawyers.
The plaintiff lawyers had help in amassing their $800 million take-from pension fund trustees who are oblivious, defense attorneys who won’t challenge the fees because it might prompt the other side to push for an even bigger settlement and insurers who are happy to charge higher premiums to cover the rising costs of litigation.

How did this happen? As usual, the law of unintended consequences of regulatory “reform” had a lot to do with it:

The Republican-controlled Congress hoped to smash this lawsuit cabal when it passed the Private Securities Litigation Reform Act in 1995.
The reform law hands control to big institutional investors. Nicknamed the “Anti-Milberg Weiss Act,” it requires that lead plaintiff status must go to the investor who suffered the greatest loss. Big investors, Congress hoped, would shun frivolous suits and push to cut legal fees.
But the act has morphed into an industrial-strength shakedown. Trial lawyers reached out to new partners: the boards of public and union pension funds. They often include union veterans unabashed about suing corporations. These boards, rather than cutting back on lawsuits and pressing lawyers for lower fees, have jumped into bed with them.

And the results of the reform legislation? Take note:

All told, public and union pension funds were lead plaintiffs in 28% of investor class actions last year; in 1996 they led just 3% of cases, says PricewaterhouseCoopers. Yet they have done nothing to improve shareholder recoveries or reduce significantly the lawyers’ cut.”We have a system where the courts consistently allow law firms to file cases on behalf of figureheads,” complains University of Arizona law professor Elliott Weiss. Translation: The lawyers still run the show. It is a pointed criticism, for Weiss did the research on class action settlements that helped shape the reform act.

Read the entire article. Hat tip to the 10b-5 Daily for the link to this article.

Krispy Kreme looking like Dunked Doughnuts

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Krispy Kreme Doughnuts Inc. announced that its auditor, PricewaterhouseCoopers LLP, refused to complete a review of the company’s financial statements for the latest quarter until an outside law firm hired by the company’s board is finished performing, ahem — “certain additional procedures” — that the auditors have “requested.”
This is not looking good for the mercurial Winston-Salem, North Carolina-based doughnut chain. Given its high profile since going public in 2000 and the current anti-business climate in the U.S. Justice Department, it would not be surprising to see a criminal inquiry emerge from Krispy Kreme’s current financial problems. I wonder if the grand jurors can bring a box of Krispy Kremes into the grand jury deliberations?
Krispy Kreme’s latest regulatory filings indicate that it had $19.3 million in cash as of Aug. 1, which is less than a third of what it raised in its 2000 initial public offering.
The company’s latest disclosure sparked new questions about Krispy Kreme’s accounting and a series of acquisitions that included the repurchase of several franchises, including two owned that Krispy Kreme insiders owned. The company recently reported a sharp falloff in growth and declining earnings, and already faces an informal SEC inquiry focused on its franchise repurchases and a profit warning it gave in May.

US Air tanks

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As expected, US Airways Group Inc. filed its chapter 22 case (i.e., chapter 11 for the second time) in the U.S. Bankruptcy Court in Alexandria, Virginia. US Air’s previous case concluded a little over two years ago.
Like its larger competitors, US Air continues to be hammered by high fuel prices, competition from discount carriers, anemic revenue and a heavy burden of debt and operating-lease commitments. With the filing, two of the nation’s six “legacy” carriers — those whose costs and cultures are rooted in the pre-deregulation era — now wallow in bankruptcy, although a number of other legacies could end up in the same court. The other legacy already in bankruptcy is UAL Corp.’s United Airlines, and Delta Air Lines is struggling to avoid the similar fate.
US Airways will maintain normal operations and honor all customer-service agreements and marketing arrangements with other carriers. US Airways’ current schedule consists of nearly 3,300 daily flights in about 180 airports in the U.S., Europe and the Caribbean.
The company’s theory of the case in its reorganization is to propose a reorganization plan by year-end that will transform the legacy carrier into a discount airline. Traditional labor and regulatory agencies will undoubtedly oppose the old-line, hub-and-spoke carrier attempting to shed its rigid work rules, inefficient work practices and richer benefits to make the transformation to a discount airline. If that occurs, then US Air may be forced into a liquidation under the weight of its massive debt obligations and lack of profitable operations, although previous legacy airline reorganizations indicate that such a liquidation will not come without creditors enduring even more losses during the reorganization case.
Another big complication in US Air’s reorganization is financing. Unlike the usual big reorganization, US Air did not file an emergency debtor-in-possession financing motion on Sunday to bolster its cash position. Because all of its assets are already pledged, the company did not even try to arrange such interim financing. However, US Air did disclose that it had reached an agreement with its lenders to give the airline access to an undisclosed portion of $750 million of cash it has on hand to use as working capital in lieu of a debtor-in-possession financing. The company said it currently has $1.45 billion in cash, cash equivalents and short-term investments.
The US Air filing gave Democratic Presidential nominee John Kerry an opportunity to comment intelligently on a business policy issue, and his campaign screwed the pooch on that opportunity. Check out the following gibberish:

“It is a tragedy that the employees of US Airways, who have already made great sacrifices to help the company stay afloat, will now suffer more harm. And it’s unforgivable that the Bush administration has sat on the sidelines rather than act to address this crisis.”

The Kerry Campaign failed to mention that the Bush administration authorized the dubious post-September 11, 2001 federal loan-guarantee program that was supposed to help the ailing airline industry, but really just delayed the inevitable in regard to such carriers as US Air. As for the real reason behind the Kerry Campaign’s above statement — US Air employs thousands in the key battleground state of Pennsylvania.