Stros go Fish

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Josh Beckett pitched seven and two thirds strong innings and the Marlins roughed up Roy O for eleven hits over six innings as the Fish downed the Stros in the final game of their series at Pro Player Stadium, 6-2.
Beckett clearly had his game face on for his hometown team as he gave up only five hits and two runs, one of which was Lance Berkman‘s third yak of the series. The Stros made it interesting by loading the bases with two out in the eighth, but the marginally competent home plate umpire Lazaro Diaz rang Berkman up on an absurdly outside pitch from Benitez and the Stros were toast.
The Stros to to Cincinnati for a weekend series with the Reds before returning to the Juice Box next Tuesday for a two week stretch of games against the Cubs and the Cards. The NL Central race is about to heat up.

R.I.P., Lord Hill-Norton

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As the members of my old Clear Thinkers email list know, I enjoy reading British obituaries. The British have a long and special talent for writing witty obituaries, and the good folks over at Southern Appeal point us to the latest example, this London Telegraph obituary of Admiral of the Fleet Lord Hill-Norton, who died this past Sunday at the age of 89. The entire obituary is a hoot, and you get a flavor for it in the first two paragraphs:

Admiral of the Fleet Lord Hill-Norton, who died on Sunday aged 89, was a formidable Chief of the Defence Staff before becoming the senior military officer in the Nato alliance; he also had a reputation for being one of the rudest men in the Royal Navy.
Almost from the beginning of his career some considered him destined either to be court martialled or to end up as First Sea Lord. His reputation for ruthless efficiency and meticulousness, combined with good luck and an irritating habit of being right, took him to the top. This made it seem all the more strange when, as a retired officer in the House of Lords, he placed rather more credence on the possible existence of unidentified flying objects than did less talented individuals.

Sounding like a character out of the brilliant British comedy “Fawlty Towers,” Lord Hill-Norton’s immediate post-WWII duties are described as follows:

By now his reputation as an abrasive and short-tempered officer was well established. He was in the habit of answering the telephone with the words: “Gunnery Division. Hill-Norton. Kindly state your business briefly; we’re busy men here.” An inadequate response would result in the telephone receiver being slammed down.

Even in retirement, the Lord’s demeanor did not improve, as is reflected by his reaction to some proposed cuts in military appropriations:

The defence cuts ordered by Options for Change did not improve his view of politicians, whom he regarded as sufferers from sea blindness. He was scathing about proposals to economise on Armed Forces pensions, and most notoriously called the then defence secretary Michael Portillo “a little creep” for suggesting the sale of Admiralty Arch.

But in classic British obituary style, Lord Hill-Norton’s obit closes with an acknowledgement of his good side:

Although Hill-Norton was feared, hated and respected in equal measure he led from the front. His harsh manner and foul language belied a man who could, on rare occasions, demonstrate an otherwise well-concealed humanity. He was always receptive to sound arguments but would not suffer fools or those who weakened before his onslaughts.
He married, in 1936, Margaret Linstow, whom he selflessly brought out of hospital to nurse at home himself in recent years. She survives him, with their daughter and son, Vice-Admiral Sir Nicholas Hill-Norton.

Backwardation of oil prices

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Don’t miss Arnold Kling’s analysis over at EconLog regarding the phenomenom known as backwardation energy prices. Arnold explains backwardation by using the example of current and future prices of oil:

As of May 20th, the June 2004 futures contract for light crude oil was at $41.66, while the June 2005 futures contract was at $35.58. When futures prices are below spot prices, this is known as “backwardation.” I believe that it represents a puzzle. Think of it this way. If you have oil, by holding onto it for a year, you are losing 15 percent. That seems kinda dumb.

Arnold goes on to explain that the various theories on why backwardation occurs all seem to be somewhat flawed, but then makes this observation and asks this very salient question:

Speculators buy low and sell high. The American and Saudi governments do the reverse. Which is the stabilizing force in the oil market?

More on the sad case of Jamie Olis

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This Wall Street Journal ($) article is the most thorough report yet on the sad case of Jamie Olis, the 38 year old former Dynegy mid-level tax manager who was convicted and recently sentenced to over 24 years in federal prison for his role in the Project Alpha financial scheme that essentially masked loan proceeds as cash flow from operations. Here are the previous posts on Mr. Olis’ case.
The entire WSJ article is interesting reading, and provides the best background piece to date on how Mr. Olis finds himself in this position. As I suspected based upon previous rulings by U.S. District Judge Sim Lake in Mr. Olis’ case, his defense team made a serious tactical error (at least in my view) by electing not to rebut the government’s evidence at trial of the damage that the Project Alpha deal caused to Dynegy shareholders:

After eight days of prosecution testimony, Mr. Olis’s lawyers believed they had poked enough holes in the government’s case to win. They rested without putting Mr. Olis on the stand — or any other witness.

That decision meant that, in considering the length of Mr. Olis’ sentence, the only evidence that Judge Lake had on damages resulting from the deal was that which the government offered:

The new federal sentencing guidelines work on a kind of point system, with more points and more prison time given if the case involves more victims, larger losses or using special training to execute a fraud. The key issue was the size of the loss suffered by Dynegy investors from the scheme: Anything more that $100 million would garner the maximum number of points, lengthening the sentence.
After considering several options, U.S. District Judge Sim Lake settled on a loss estimate of $105 million — the amount the University of California retirement fund lost on Dynegy stock, a hit the fund attributed to Project Alpha. With that loss and other factors, the guidelines recommended a sentence of 292 to 365 months.

As the article relates, Mr. Olis remains convinced of his innocence and, thus, remains unwilling to assist the government in its investigation and possible prosecution of other Dynegy executives and outside lawyers who were implicated in the scheme during Mr. Olis’ trial:

But such cooperation seems unlikely. Though “facing years away from his wife and daughter, Jamie remains strong in his convictions,” close friend Joan E. Quinn wrote to Judge Lake before the sentencing.
Mike Shelby, the U.S. attorney for the southern district of Texas, who supervised the case, isn’t sympathetic. “We have been rebuffed at every turn” by Mr. Olis, said Mr. Shelby. “I would ask the question, ‘Why don’t you help us?’ “

My speculation: “Despite the tactical errors of his defense, maybe because Mr. Olis did not deserve 24 years in prison.”
I continue to maintain that the criminalization of questionable business practices — combined with the government’s sledgehammer approach of forcing executives to defend themselves only at the risk of what amounts to a life prison sentence if they lose — is an extremely unfair and unwise governmental policy. And this from an administration that touts itself as “business friendly?”
If you are interested in reviewing more on this topic, Professor Ribstein over at Ideablog has provided some of the best analysis of the Olis case and this troubling trend of the government criminalizing such things as bad accounting.

Stros are road warriors

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For the second straight night, the Stros hammered a pitcher who had dominated them a week earlier and improved their road record to 12-4 as they beat the Marlins at Pro Player Stadium, 10-2.
Tim Redding continued his improved pitching of late by stifling the Fish on three hits and two runs over six and two thirds innings. The Stros got to the Marlins’ Carl Pavano for nine hits and five runs over seven innings, and Lance Berkman again led the Stros’ hitting attack with his seventh dinger and a couple of RBI’s. Also, Morgan Ensberg‘s two hit and three RBI performance continued to make it difficult for manager Jimy Williams to rationalize platooning him, as is his instinct.
The Stros go for the series sweep in the Thursday night by sending Roy O to the hill, but it won’t be easy. Spring’s Josh Beckett will likely be at his best as he attempts to beat his hometown team. Tune in for at least a part of this one and enjoy watching two of the best young pitchers in Major League Baseball. The Stros go to Cincy for a series with the Reds over the weekend, and then return to the Juice Box next Tuesday for consecutive series against the Cubs and the Cards.

Another former Enron exec cops a plea

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This Chronicle story reports on today’s plea bargain and settlement involving Paula Rieker, the former Enron managing director of investor relations. Under the deal, Ms. Rieker will turn over to the SEC nearly half a million dollars she made off the sale of stock the summer before Enron filed bankruptcy in early December, 2001, and she will plead guilty to a criminal insider trading charge under a cooperation agreement to testify for the Enron Task Force. Here is an earlier post that anticipated the deal.
Rieker is charged with knowing about significant losses at Enron’s defunct broadband business and selling her Enron stock before the company’s myriad problems were fully revealed to the public. Rieker was the managing director of investor relations for Enron in mid-2001 when the stock sale occurred. Later in 2001, she became the secretary to the board of directors and continued in that position until recently.
Under the SEC settlement, Ms. Rieker agreed never to serve again as an officer or director of a public company and, upon court approval of the settlement, will pay the SEC roughly $500,000, which is her profit from the sale of the stock. As is standard in these deals with the SEC, Mrs. Rieker did not admit or deny the SEC’s charges against her.
In the criminal case, Ms. Rieker has been cooperating with the government and she could be a valuable witness for the government as she prepared earnings releases and internal scripts for conference calls with analysts. The Task Force’s allegations against ex-CEO Jeff Skilling focus largely on alleged misrepresentations made about Enron’s earnings, and it is likely that any prosecution of ex-Enron Chairman Ken Lay would also also focus on such alleged misrepresentations. Lay has not yet been charged with any crime
Over two dozen individuals have been criminally charged in the Enron Task Force’s investigation, but none of those individuals have taken a case to trial. Several have pleaded guilty to various charges and are cooperating with the continuing investigations. Among those cooperating is former Enron Chief Financial Officer Andrew Fastow, whose cooperation facilitated the indictments earlier this year of Mr. Skilling and former Enron chief accountant, Richard Causey.
The first Enron-related criminal trial — the one known as the “Nigerian Barge case” involving several mid-level former Enron executives and former Merrill Lynch executives — is currently scheduled to begin in on June 7 in Houston before U.S. District Judge Ewing Werlein.

Texas GOP: please read this

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From this Dallas Morning News Editorial (free online subscription required):

The GOP Challenge: Can Republicans govern Texas?

With school finance blowing up on the GOP leadership in Austin, you have to wonder if Texas Republicans will learn from history.
Back in the 1950s and 1960s, conservative Democrats like Govs. Allan Shivers and John Connally commonly fought with liberal party members. The feuds became so prominent that the disputes left room for the state’s infant GOP to quietly but steadily develop. By the start of the 1980s, the Texas GOP was on the rise while the Texas Democratic Party was on its decline.
We point this out because Texas Republicans now are at their own crossroads. They are skirmishing like Democrats of old.
The Legislature’s failure to come up with a fix for school funding wasn’t because Republicans and Democrats were brawling, although there were conflicts between the parties. The breakdown came because Republicans couldn’t agree with Republicans. The GOP controls the governorship, the House and the Senate. And that’s where the feuding has mostly taken place over the last month.
Now, some of the fight is about honest disagreements. But the real quarrel is about whether the Legislature should raise business taxes to put more money into Texas schools. Gov. Rick Perry hasn’t wanted to do that, Lt. Gov. David Dewhurst fortunately is willing, and House Speaker Tom Craddick is somewhere in between.
Republicans need to recognize the state needs a new pool of funds to improve schools. And they need to come to that reality fast.
Since 2002, when Republicans took over all parts of the state’s government for the first time in 100-plus years, the Legislature has broken down into bitter fights over the state’s budget, congressional redistricting and, now, school funding. If Texas Republicans don’t fix this situation, then Texans will have a right to wonder if the GOP knows how to govern.
Republicans may want to check in with the state’s Democratic elders on this point, too. They know what it’s like for voters to take away their power.

In the meantime, I will not hold my breath waiting for the Texas legislature to begin considering such innovative approaches as are reviewed in this prior post.

Continental responds to fuel cost increase

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This NY Times article reports on Houston-based Continental Airlines‘ plan to respond to the recent spike in fuel prices that are straining profits of all airlines. Fuel is the second-biggest expense for airlines, after labor costs, and typically totals about 10% of operating costs.
Continental raised fares across the board late yesterday and said it will have to consider furloughs and wage cuts if jet-fuel prices do not decline from their current record levels. Continental raised ticket prices $10 each way for flights of as much as 1,000 miles, and $20 each way for longer trips. However, under heavy pressure from discount airlines, major carriers such as Continental have seen previous attempts to boost ticket prices fail when competitors decline to match. Even if this current increase sticks, Continental said it would offset only 15% of its higher fuel tab.
At current prices for oil, Continental faces an additional $700 million in annual operating expense over what it originally had planned for 2004. As a result, Continental CEO Gordon Bethune said he expects Continental to suffer a significant loss for 2004.

Jenkens & Gilchrist ordered to disclose tax shelter clients

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As noted in this earlier post, U.S. District Judge James B. Moran of the Northern District of Illinois refused to dismiss a Justice Department lawsuit government lawsuit that seeks to force Dallas-based law firm Jenkens & Gilchrist to turn over the names of hundreds of clients who bought tax shelters that the firm allegedly promoted.
Now, Judge Moran issued a May 14 order for Jenkens & Gilchrist to turn over documents the Internal Revenue Service sought in five administrative summonses. In the order, Judge Moran said the law firm’s clients can raise claims of attorney-client privilege concerning the documents, but that few of such privilege assertions will prevail and he warned that clients could face sanctions for making frivolous privilege claims.
As noted here a couple of months ago, Jenkens & Gilchrist agreed to pay $75 million to settle civil claims from clients concerning tax-shelter legal opinions. Here are the other recent posts concerning the legal challenges facing Jenkens & Gilchrist in regard to the firm’s tax shelter advice.

The benefits of higher oil prices

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During a political season, you will not hear much about the benefits of higher oil prices. But this Wall Street Journal’s ($) Holman W. Jenkins, Jr. Business World column dissects the issue and concludes that increased oil prices are not all bad. First, Mr. Jenkins addresses the current price spike and the reasons behind it:

The futures market puts oil for delivery next summer at $35, well under today’s $41. Seers are not hard pressed to explain why. On April 24, three small boats operated by suicide commandos hit Iraq’s southern oil terminal and a few days later kamikaze gunmen shot up a Saudi petrochemical plant. Osama bin Laden has a plan: Get control of Saudi Arabia through subversion and put himself in charge of its oil, foundation of a new Islamic empire. That is, Saudi survival can’t be taken for granted.
Traders say five to ten bucks of today’s price is due to terrorism fears. Notice also that the biggest speculator out there is the U.S. government, which has been frantically topping off the Strategic Petroleum Reserve ever since November 2001, yelps from private energy buyers notwithstanding.

Then, Mr. Jenkins focuses on the real issue, which is not a shortage of oil:

Note that the issue is not whether the world is running out of oil. The debate concerns a theoretical milestone called Hubbert’s peak, after which output from any given field slows and becomes more costly to produce long before the last drop is lifted. Half of Saudi Arabia’s oil comes from the giant and venerable Ghawar field; much of the remainder comes from four other aging giants that may be at or near their Hubbert’s peak. . .
How much oil is left is far less significant than how quickly and cheaply it can be extracted, especially from a relative handful of large, cheap-to-produce fields that have carried industrial man for a century. Some believe that getting much above today’s 80 million barrels a day would be horrendously costly if not impossible. If they’re correct, two billion Chinese and Indians, right now beginning to trade their bicycles for Toyotas, would be stuck trying to achieve modernity by outbidding the rest of us for a share of the world’s current rate of oil production rather than benefiting from additional output.
All this has some petroleum engineers predicting resource wars, famine and pestilence, preventable only by a massive effort of central planning to shift the world to a less hydrocarbon-intensive lifestyle. If so, we might as well pass around the cyanide caplets right now. Such global planning is certainly beyond the wisdom and power of politicians to manage.

Which brings Mr. Jenkins to his central theme — i.e., the benefits of higher oil prices:

Yet the unwillingness of doomsayers to credit price signals with eliciting changed consumption behavior, new technology, a thousand substitutions and other adaptive responses is more than a little peculiar here. Oil companies have held back from investing in deep-water searches, Canadian oil sands and Venezuelan bitumen for fear oil prices will plummet to $15. Shareholders have kept Big Oil on a short leash, tolerating only low-risk investment projects that will generate cash flow in a small number of years. Won’t this change now if higher prices seem a permanent feature of the landscape?
Motorists might or might not be willing to swallow price hikes, but what about other industries that use petroleum as feedstock? They’re price sensitive and would be expected to adapt in ways that aren’t all easy to foresee from today’s vantage.
Scare talk is a hardy perennial in the global petroleum business, a passport to fun and attention from the media. Industrial society is frequently painted as a fragile, vulnerable machine, yet all the evidence suggests the opposite: It’s a machine that has grown more resilient and adaptable the more complex and interdependent the world becomes. In short, as long as the price mechanism is allowed to work, mankind seems likely to muddle through. Hallelujah, then, for higher oil prices.

Amen.
On a related note, although not quite as insightful as Mr. Jenkins’ piece, this NY Times editorial strikes the correct theme that short term spikes in energy prices is not a cause for overreaction.