Posted 2:21 PM by Robert

Savaging Martha II

UPDATE: Merrill has given the government a document that appears to support Ms. Stewart's versions of events.

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The government's actions against Martha Stewart in connection with her possible insider trading now constitute a kind of "trial by circus."

If regulators think that Ms. Stewart broke the law, then let them convey the evidence they have to a grand jury or bring a civil claim against her.

But it is just idiotic for the matter to be handled as a public, three-ring entertainment by a Congressional committee whose "spokesman" - some character named Ken Johnson - assaults Ms. Stewart daily with media interviews that contain little if any new information, but seem some variety of naked spin control directed at savaging her repuation (and her company's stock price) in apparent despair of any actual enforcement action.

The article linked above, for example, is all about Mr. Johnson's excited revelation that there is "no credible evidence" of Ms. Stewart's purported oral "stop loss" order. Not mentioned in the article is that for many days Ms. Stewart's broker has apparently admitted that his only record of the order were his hand-written notes.

Mr. Johnson does not find those 'credible". Fine. But that is not new or news. It's spin when it comes from Mr. Johnson's mouth, and it's spin when the media runs the story.

And it should stop. The only reasonable conclusion one can reach from the continued circus is the government's conclusion that it can bring neither a criminal nor even a civil charge against Ms. Stewart. If so, the government should just move on.

Admitted, unsupported slander and campaigns of innuendo are not enforcement mechanisms available to the SEC, Congress or the Justice Department in suspected insider trading cases.

Posted 12:44 PM by Robert

Options III

Jane Galt posts a thoughtful meditation on executive options, and cites to a proposal of Mindles H. Dreck in this area. Now the Man Without Qualities is a big fan of Jane and Mindles, and I would not call what follows criticism. But I would like to raise a few questions about some things. Specifically, Jane writes that executive compensation should:

"Preferably, move away from options and towards either a stock grant with a lengthy blackout, or the elegant solution proposed by Mindles H. Dreck: base compensation on the company's stock's outperforming stocks in it's industry sector; after all, we don't want the executive to benefit or be penalized by changes in the sector, but for how well said executive manages to maximize profits given market conditions."

Well, a stock grant with a lengthy blackout has some features that are worth thinking over. Suppose the stock of a public company is trading at, say, $100 on the day of the stock grant. The granted shares dilute the existing shareholders - which is not a problem. But by how much? Well, all the shares look alike and the company could have sold the granted shares to the public for $100 instead of giving them to the executive. So it's hard to see how the company hasn't divested itself of something worth $100. That $100 was given in exchange, we hope, for something worth more than that from the executive - but that's another story.

Is the granted stock worth $100? No. Free trading stock is worth $100 - but this is restricted stock with a lengthy blackout period. Maybe it's "worth" $70. But even this is a highly artificial number, since by definition there is no market for the stock (because there is no market for something that can't be sold).

In short: The company just spent $100, but the executive received much less than that. What happened to the difference? Does one still feel comfortable that the interests of the stockholders and the executive align through this mechanism?

Alignment? How important to an executive holding stock he cannot sell for, say, five years is it for the stock to do well this year? And yet most public stockholders want their stocks to do well this year. In terms of "risk acceptance": Might such an executive have an inefficient incentive to favor long-term or medium-term projects over potentially lucrative short term projects - an incentive which seems to have had an almost inconceivably terrible long-term effect on Japan, at one time the world's champ in "long term planning." If the company pays dividends based on current results, won't the difference between the tax rates on dividends and capital gains tend to make the executive favor projects that yield cash in, say, five years (when he can sell the stock and pay capital gains rates) rather than today (when he has to pay tax at the much higher individual rate)? Are shareholder and management interests "aligned?" It doesn't look like that.

Jane's point (and it is a good one) is that interests of option holders and stockholders are not fully aligned. That is true, because the interests of any holders of different securities are not fully aligned. Restricted stock and free trading stock are not the same securities. To say the executive is a "stockholder" is a kind of pun.

To see this clearly, supposed the company issued to the public two types of stock on a single day: Stock A, which is free trading common stock listed on a national securities market and Stock B, which is preferred stock having all the same characteristics of common except that it could not be sold to anyone else for three years. Does anyone think the price the public would pay for these securities would be close? Suppose the blackout period was thirty years. Of course, the same considerations will apply to stock obtained by exercise of options if the stock is subject to a "blackout period."

For a very long time Anglo-American property law has discouraged most restraints on property alienation. It was not always so. In the Middle Ages, heavy restriction on the right to sell real property was the norm. Eventually, those societies realized that practice was costing them many fortunes - and that was just on the basis of "dead weight loss," without consideration given to any aligning of interests. Neither current property law nor I say that all restraints on alienation are a bad thing - but they are very dangerous and have a very dubious history.

All of the above are corollaries of a very general rule: IT IS NOT POSSIBLE TO ALLIGN THE INTERESTS OF MANAGEMENT AND PUBLIC STOCKHOLDERS, AND DISFAVORING ANY COMPENSATION DEVICE BECAUSE IT FAILS TO ALLIGN THE INTERESTS OF MANAGEMENT AND PUBLIC STOCKHOLDERS IS JUST SUCCUMBING TO A NIRVANNA DELUSION. I am not saying Jane or Mindles so succumb - what they are doing is really trying to find something that aligns these interests better than the other alternatives.

Why is it not possible to align management and shareholder interests? Because, as noted above, the interests of the holders of any two different company securities will not have aligned interests. But because management (by definition) runs the company, management's interest in the company must always be substantially different from that of public shareholders whose involvement is passive up to rare, difficult shareholder votes. Everying managment gets from the company - including expense accounts and use of the corporate jet and even the art on the walls - are all included in the company securities held by management. No public shareholder ever has the same things.

What about "the elegant solution proposed by Mindles H. Dreck: base compensation on the company's stock's outperforming stocks in its industry sector?"

Well, again, I do not mean my observations to be taken as criticisms since the objective here is not to show that the proposed structure does not align shareholder and management interests (a fool's errand, as just described). But consider the following:

Suppose the "sector" under consideration is telecommunications (or some part of it). Should Sprint's and AT&T management get a boon because WorldCom indulged in fraud and caused the stock of that company to decline to zero? On a relative basis within the sector, the stock of WorldCom's competitors have benefited from this disaster. Should the competitors' shareholders pay their management a bonus because of that? Why?

Further, not all companies in the same sector compete with each other. Consider two home-construction companies, one active on each coast. Why should they be lumped together for purposes of executive compensation? Isn't that a thought more at home in considering how to compensate the fund managers who can choose to invest in either of the two non-competing companies. Which is to say: Such companies do compete, but only in the financial markets for investment funds.

More generally, are "sectors" convenient but arbitrary classifications from a market perspective - based essentially on individual prejudices about the past? They are certainly useful from the standpoint of fund managers.

But making company executives act like fund managers would seem to lead to executives structuring their companies to resemble funds. That kind of company is called a conglomerate. Do we want to encourage formation of conglomerates?

And do conglomerates have "sectors?" What "sector" is General Electric in these days?

Jane also suggests that companies should:

"Eliminate the practice of re-pricing options, where an executive's pet board gets to decide that the stock decline wasn't really his fault and he should get to make a profit off his options anyway."

As I noted in a prior post on this topic, the repricing of options is a tool. I do not see the relevance of any concepts of “fault” if they differ from the never-ending task of finding the right incentive structure for future performance. If, for example, some terrorists fly a plane into the World Trade Center and thereby cause Nevada gaming company stocks to tank, an owner of such a company has a choice: (i) reprice or (ii) refuse to reprice and thereby lose the Chairman/CEO and every other good executive to a competitor or retirement (or, worse, continued employment disconnected from any real concern with the stock price). Of course the company should reprice in some way (although NOT by just changing the price on the existing option.) Kirk Kirkorian understood this when he caused the company he owns, MGM MIRAGE, to reprice its options - and most people don't count him as a financial dummy.

The key to Jane’s example is the concept of “pet board.” The board runs the company. If the board has become disengaged from stockholder interests, then they will misuse ANY tool of executive compensation. Almost by definition.

The real problem here seems easy to state: Corporate governance reforms should focus on aligning the interests of members of boards of directors and shareholders. And most “reform” proposals floating around now, such as increasing the number of “outside directors,” DO NOT DO THAT.

What is the best mechanism for aligning the interests of the board and the shareholders? Why, it’s our old friend: THE MARKET FOR CORPORATE CONTROL. That is, HOSTILE PUBLIC TENDERS.

But the market for corporate control has been largely numbed (but not entirely eliminated) in this country in the hunt to get Gordon Gekko. That’s another story.

Posted 10:55 PM by Robert

That was Then .. This Is Now

Is it more acceptable for a Presidential candidate to admit having been "programmed and controlled" than "brainwashed?"

Posted 4:56 PM by Robert

UPDATE: Let's Play "Kill the Man with the Financials!"
Paradigm Shift Alert:

The New York Times today brings troubling news in the form of a photograph of the CEO and Chair of Xerox Corporation, Anne M. Mulcahy, who appears to be a plucky strawberry blonde! Xerox conceded earlier that as part of a settlement with the Securities and Exchange Commission it would reclassify more than $2 billion of revenue from previous years, and said yesterday that it was in fact restating a much larger amount, $6.4 billion.

What's next? Maybe some ex-Michigan linebacker blowing the whistle on Ms. Mulcahy?

And what will this do to the media's (especially Maureen Dowd's) paradigm?

Posted 7:15 PM by Robert

Let's Play "Kill the Man with the Financials!"

Hunter S. Thompson was wrong when he criticized the ether binge. In fact, there is nothing in the world more helpless and irresponsible and depraved than an academic economist in the depths of a legal reform binge. And I knew we'd get into that rotten stuff pretty soon.

The most recent example of this grim phenomenon is Burton G. Malkiel, a professor of economics at Princeton, who today snorts on the editorial page of the Wall Street Journal that:

There is no way one can legislate accounting standards and there is no way to fix generally accepted accounting principles so that full transparency is assured. But perhaps the most useful thing we can do is to accept the suggestion of Treasury Secretary Paul O'Neill that CEOs should personally vouch for the veracity and fairness of their company's financial statements. Perhaps the independent chair of the firm's audit committee should sign the statement as well. If the firm's statements later prove to be misleading, the CEO should be held criminally liable.

One wonders why Professor Malkiel does not have full faith in his insights. Strict criminal liability? Heck, why don't we just kill the CEO if the financial statements are later judged to be misleading? Didn't that kind of thing work when Mussolini ordered the engineer on any late train shot? Didn't that make the trains run on time? Of course, a naïf might be concerned that such "reforms" might lead to a certain inefficient conservatism in the financial statements of public companies. [And, as Ben Sheriff points out, overly conservative financials are misleading in their own way. So the CEO is doomed no matter what. Like the male black widow spider, the CEO is now to mate with the company only to be devoured.] But this is foolishness. In fact, under either Professor Malkiel's theory or my enhanced version, the CEO of a public company would never have an IQ in excess of 50, for surely nobody with an intelligence quotient higher than that would even consider remaining CEO of a public company, although to be fair to Professor Malkiel one must admit a certain tension between my enhanced proposal and some recent Supreme Court decisions.

One can imagine the scene in the office of, say, Sandy Weill, head of Citigroup, as his assistant enters with the freshly prepared annual financial statements for the sprawling financial services company. The plucky strawberry blonde lays the signature pages before the financial world's éminence grise with a perky comment:

Plucky Strawberry Blonde: "Here are the financials for you to sign. And you asked me to remind you about our treatment of the Argentina loan exposure at the commercial bank level, and that you will be held personally criminally liable if some jerk (as you called him) at the SEC thinks the financials are misleading after the fact. Here's your Mont Blanc."

Éminence Grise: "I think I need a new corporate title and a drink! ... What's this stuck to the back of the financials?"

P.S.B.: "O, you don't need to read that now. That's just my draft whistleblower memo to the Senate Finance Committee in case we need to put you in jail. The accountants added a macro to the spread sheet program that spits one of those out automatically every time they run the financials. They figured the things people like Watkins and Rowley were writing were so formulaic that it would save time to just add the whistleblower memo to the spread sheet program. You know ... the usual stuff. Climate of fear and/or greed. Oppressive male power structure. That kind of thing. It really only took a few lines of programming - and now it's all updated automatically every quarter."

E.G.: "I feel so reassured."

P.S.B.: "Yes. And here's a reprint of the latest paper from that nice Professor Malkiel at Princeton. It's titled "The Public CEO: Who Needs One? Who Wants One? Catchy, huh?"

E.G.: "Like an ad jingle."

P.S.B. "The paper intro says its based on the author's careful study of the Orpheus Chamber Orchestra, a classical orchestra that performs without a conductor, with the discovered principles carefully applied to the modern corporation. Isn't that interesting? I didn't know they had those."

E.G.: "The man's a genius."

P.S.B.: "And the CFO called this morning to say our stock price has now reached drill-bit size. What did he mean by that? But he said not to worry, that we have lots of company now that Congress passed that reform act. Something about nobody being able to hire management any more."

E.G.: "I guess there's always a bright side. Good to have a CFO who sees the bright side."

P.S.B.: "Also, the company's last in-house lawyer cleared out his office yesterday. We're now entirely dependent on expensive, outside counsel relatively unfamiliar with our needs. Legal expenses are expected to increase about 1,000% this year with only a modest drop in effectiveness."

E.G.: "At last. After that Andersen verdict those in-house lawyers were just land minds waiting to go off. How many times did I hear one of them ask not to have their name added to my memo. Suicide, Plucky. Suicide."

P.S.B.: "O, yes, one last thing. Our lobbyist called from Washington to say that the President will sign that bill making academic economists strictly criminally liable if their advice and studies are used to support public policy changes but are then found to have been misleading."

E.G.: "Wonderful. It's a small thing - but it makes me feel so good."

Posted 11:28 AM by Robert

Al Gore: Stand Up Comic!

UPDATE: Could Al Gore be planning a "Punch-and-Judy" type show with Paul Krugman? Among several hilarious things Mr. Krugman says in his column today is his observation:

"I'm not saying that all U.S. corporations are corrupt. But it's clear that executives who want to be corrupt have faced few obstacles."

That may have been true during the Krugman-beloved Clinton-Gore years, but with all these investigations and prosecutions launched by the Bush-Cheney team, such corrupt executives seem to be having a pretty hard time of it now.

Mr. Krugman builds his column around the conceit that different kinds of fraud are like different flavors of ice cream.

But somehow Mr. Krugman neglects to mention Clinton-Gore Tutti-Frutti - the most elaborate flavor of them all!

Word is Hillary is still selling it as filler for special sweet treats made with her own home-baked cookies - right there on the summer sidewalks of New York!

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Amid a growing series of public company scandals now emerging from the Clinton-Gore era, Al Gore himself appears to have taken to stand up comedy!

Many people thought Messrs. Clinton and Gore were running the federal government - including the Securities and Exchange Commission and the Justice Department fraud division - until January 2001. That would mean they were in charge while most of the alleged Enron chicanery went on and while Tyco did its questionable thing. Today we learn that Xerox Corp. will restate its Clinton-Gore years (1997-2000 in this case) results to reclassify more than $6 billion in revenues. This restatement resulted from the April 2001 settlement between Xerox and the Bush-Cheney SEC. Even the more recent corporate irregularities in the news clearly began in the Clinton-Gore era. For example, between September 2000 and year-end 2001, WorldCom extended its CEO, Mr. Ebbers, more than $430 million in unsecured loans to buy company stock -- of which $343 million were outstanding at the time the Bush-Cheney SEC announced it was opening an investigation. It is remarkable how many Clinton-Gore era irregularities Harvey Pitt and his new SEC have uncovered in the brief time they have controlled that agency.

But, with perfect comic timing, at a Democrat fund raiser in New York, "Mr. Gore blamed the nation's economic scandals — from Enron to WorldCom — last night on President Bush's economic policies." Mr. Gore almost seemed to suggest that the Bush-Clinton tax cuts somehow retroactively caused fraud from the Clinton-Gore years. What a card!

Having helped preside over eight years of non-feasance that allowed and inspired exactly the abuses now filling the news, Mr. Gore argued as persuasively as he dances the Macarena: "You see now what it means to have an administration that's that committed to fighting and working on behalf of the powerful, and letting the people of this country get the short end of the stick."

Mr. Gore also said the Securities and Exchange Commission isn't doing its job, and he called on its chairman, Harvey Pitt, to resign, suggesting Pitt is too cozy with captains of industry.

The article says that Mr. Gore was sounding likely Democrat campaign themes for November, but it does not say whether any of the 200 people in attendance were injured by convulsive laughter.

Posted 1:57 AM by Robert

Savaging Martha

UPDATE: The New York Daily News writes that Mr. Bacanovic has offered to testify only if he given immunity. That would be a nice deal for him - especially if the deal only requires that he tell what he knows, and does not actually require him to incriminate anyone (that is, Martha Stewart). In that case, he could just reaffirm his already-told story. And he should be sure to say a lot, because under current federal law, he could essentially make it impossible for the prosecution to convict him with any evidence at all from whatever source just by making his testimony broad enough to taint every relevant fact. Could the prosecutors be silly enough to fall for that?

If a deal did require him to incriminate Ms. Stewart (or anyone else), a jury would probably seriously consider disregarding the resulting testimony. The recent refusal of the Andersen jury in Houston to accept that David Duncan even committed the crime to which he had confessed under similar pressure shows just how skeptical juries are of testimony obtained through such new-age torture techniques.

Of course, what is really strange about the prosecution's fixation on Ms. Stewart is that SHE IS NOT THE BIG FISH, regardless of whether she sold on insider information. If clear evidence of her guilt appears, then of course she should be prosecuted. But unless the government has indications that Ms. Stewart has done this kind of thing often before (and there have been no reports of that) it is just a ridiculous waste of time and public money for the prosecution to be making heroic efforts to bring her down as if she were some kind later-day Joe Bananas.

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Martha Stewart is now, of course, under considerable pressure for her December 27, 2001 sale of about $250,000 worth of ImClone stock. The Man Without Qualities does not know Martha Stewart or whether she will ultimately be exonerated of the suspicions against her. However, if the state of the evidence in this matter is accurately reflected in the media, the hostility being cultivated against her is far from justified at this time.

As things are reported by the Wall Street Journal to stand now, Ms. Stewart and her broker, Peter Bacanovic each say that the ImClone stock in Ms. Stewart's account was subject to an oral $60 "stop loss" order. Such oral orders are really not rare with very wealthy people. Unless one of them changes that story, there is no material risk that either of them will be exposed to a charge of "obstruction of justice" or "insider trading" on account of Ms. Stewart's trades. Moreover, while reporters can write about an "expanding investigation," that Douglas Faneuil (Mr. Bacanovic's sales assistant) now doesn't support the existence of the oral stop loss order, and the assistant's reported assertion that Mr. Bacanovic "pressured" him - it will take quite a bit more than any of that to put Ms. Stewart in real danger. If Mr. Bacanovic "pressured" his assistant to lie, that could be a problem for Mr. Bacanovic. But it is not surprising that he would want his assistant to back him up if the "stop-loss" story really happened exactly the way Mr. Bacanovic said it did. So the "pressuring" doesn't add a lot of information with respect to Ms. Stewart. A more relevant enquiry - but one that to my knowledge has not been reported - is whether Mr. Bacanovic can cite to any other cases of his accepting oral "stop-loss" orders which he did not enter in the Merrill computer. Since Mr. Bacanovic is reported to have had a good number of Park Avenue set clients, he may be able to come up some such unentered orders.

Nor does the supposed "discrepancy" in the Bacanovic/Stewart versions of the "stop-loss" order, where she says the order was placed in November but he says December 10, amount to a hill of beans. If the two of them had invented the "stop-loss" order, why couldn't they agree on the date? Ms. Stewart is not exactly known as someone who has trouble with details. This "discrepancy" if anything suggests they did not invent the "stop-loss" order after the fact. Further, the e-mail that started the whole chain of events was sent on December 24 - two weeks after the last date both of them agree the "stop-loss" was in effect.

Nor does Mr. Bacanovic's December 27 telephone call to Ms. Stewart raise serious questions as to her - and it certainly is not inconsistent with the existence of a $60 "stop-loss" order. Some people (especially Congressional staffer Ken Johnson) have suggested that it would be strange - and potentially incriminating - if the stock had not yet declined below $60 at the time of the call. That is a real stretch. On December 27 the stock was at best just above $60 - and had been trending downward for weeks. So even if the price had not declined below $60 at the time of the call, Mr. Bacanovic certainly knew it might very well do that during the day - thereby activating the "stop loss." It is not surprising that a broker would call a client to inform her that he would likely be using her prior oral instructions to sell a quarter million dollars of her property during the day. Most people would not be surprised to get a call from their broker under such circumstances. Some people (again, especially Mr. Johnson) have suggested that it is suspicious that the telephone note taken by Ms. Stewart's assistant said that Mr. Bacanovic thought the ImClone stock price would start declining - even though it already had been declining for weeks. But the note is hopelessly ambiguous - as are many notes taken by busy assistants. And accepting Mr. Johnson's suspicion means we are to believe that Mr. Bacanovic would leave insider information that could put him in jail in a secretary's telephone note.

Unless and until some real evidence that Ms. Stewart lied to federal investigators emerges - and nothing meeting that description has percolated up yet - it is hard to understand why the media is so anxious to bring Ms. Stewart down. Worse, it is just outrageous that someone like Ken Johnson - a representative of the congressional committee investigating this matter - is repeatedly shooting his mouth off and raising essentially unfounded hostility towards Ms. Stewart. Nor is it proper that Merrill Lynch officials seem to be feeding their unsupported suspicions to the media on what seems to be an often-anonymous basis.

Perhaps all the people so anxious to savage Martha Stewart on the basis of very thin evidence indeed might keep in mind that by doing so they are throttling the stock price of Martha Stewart Omnimedia, Inc. - a public company. That means a lot of hostile, irresponsible, unsupported speculation has cost a lot of innocent public shareholders a lot of money. Shouldn't there be a few more facts gathered before the demolition begins so much in earnest?

The actions and statements to the media of Ken Johnson - the Congressional committee "spokesman" - have been particularly irksome and gratuitous in this regard. Could he be upset that a Polish-American woman from Nutley, New Jersey who has never pretended to be anything else (despite the carping suggestions of her critics to the contrary) has made out so well all by herself? And this while sad Mr. Johnson has to make do on a Congressional staffer's salary.

Posted 5:24 PM by Robert

Tales From the Souter Woods

Glenn Reynolds has drawn attention to a very interesting paper by Thomas Davies detailing the descent of Justice Souter into what might be called "intellectual fraud" in one of his opinions. But it may be that not only some law professors are tiring of what they see as Justice Souter's tale-tellings.

The just-released Supreme Court decision permitting school vouchers is interesting in many ways - and one of them is its manifestation of impatience by the majority Justices, especially O'Connor in her concurring opinion, with what they seem to come close to calling Justice Souter's intellectual dishonesty. Some representative samples from the O'Connor concurrence are reproduced below. In each of them there is, at least to my eye, more than the customary effort to get the better of a dissenting Justice's argument. There is a recurring accusatory theme: Justice Souter ignores evidence. He unfairly uses precedent. He cites narrow data selectively to support broad conclusions. In short, the implication seems to be that SOUTER IS INTELLECTUALLY DISHONEST, and some of the Justices are more than a little fed up with it. In comparison, while Justices Stevens and Breyer each filed separate strong dissents, Justice O'Connor does not suggest that they lack intellectual honesty the way Justice Souter does. Justice Souter has sometimes been thought to be an influence on Justices O'Connor and Kennedy (as in the Court's abortion cases). So if Justice O'Connor's is becoming alienated from her colleague's tactics, that could have far reaching consequences.

Here are the excerpts from the O'Connor concurrence:

"JUSTICE SOUTER portrays this inquiry as a departure from Everson. ... A fair reading of the holding in that case suggests quite the opposite."

"There is little question in my mind that the Cleveland voucher program is neutral as between religious schools and nonreligious schools. ... JUSTICE SOUTER rejects the Court’s notion of neutrality, proposing that the neutrality of a program should be gauged not by the opportunities it presents but rather by its effects. ... JUSTICE SOUTER’s notion of neutrality is inconsistent with that in our case law."

"To support his hunch about the effect of the cap on tuition under the voucher program, JUSTICE SOUTER cites national data to suggest that, on average, Catholic schools have a cost advantage over other types of schools. ... Even if national statistics were relevant for evaluating the Cleveland program, JUSTICE SOUTER ignores evidence which suggests that, at a national level, nonreligious private schools may target a market for different, if not higher, quality of education."

"JUSTICE SOUTER’s theory that the Cleveland voucher program’s cap on the tuition encourages lowincome student to attend religious schools ignores that these students receive nearly double the amount of tuition assistance under the community schools program than under the voucher program and that none of the community
schools is religious."

"And of the four community schools JUSTICE SOUTER claims are unavailable to voucher students, he is correct only about one..."

"JUSTICE SOUTER’s evaluation of the Hope Academy schools assumes that the only relevant measure of school quality is academic performance. It is reasonable to suppose, however, that parents in the inner city also choose schools that provide discipline and a safe environment for their children."

"Ultimately, JUSTICE SOUTER relies on very narrow data to draw rather broad conclusions."

"What appears to motivate JUSTICE SOUTER’s analysis is a desire for a limiting principle to rule out certain nonreligious schools as alternatives to religious schools in the voucher program."

Posted 4:25 PM by Robert

You Don't Say

While the now-infamous Ninth Circuit "Pledge of Allegiance" case and the Supreme Court "vouchers" case have been attracting attention, another judicial decision just released by the Supreme Court is also worth noting.

In that case, REPUBLICAN PARTY OF MINNESOTA v. WHITE, the United States Supreme Court overturned a Minnesota Supreme Court rule that prohibited a “candidate for a judicial office” from “announc[ing] his or her views on disputed legal or political issues.”

This rule did not pertain to specific cases pending or likely to become pending before the courts. This rule prohibited judicial candidates from saying things like: “I think it is constitutional for the legislature to prohibit same-sex marriages.” Also forbidden were statements such as: "In my view, the Minnessota constitution includes more personal privacy protections than does the federal constitution - and that means that people have a state-constitutional right to engage in political speech in shopping malls," even if there was no shopping mall case before the courts, or about to go before the courts, at that time

Which comes to this: Minnesota elects judges, but the Minnesota Supreme Court rule prohibited candidates running for those elected offices from saying what they would do if they were elected even in general terms. Put another way, the Minnesota Supreme Court rule said to judicial candidates: "You are prohibited from talking about controversial but abstract issues directly related to the public office for which you are a candidate if you relate those abstractions to, say, a specific statute or set of facts. And you can't criticize past Minnesota Supreme Court decisions if you also say that you would not consider yourself bound by those decisions" That sounds like an election rule one might find in, say, Pakistan - since it is hard to imagine something that so obviously offends the First Amendment.

It is weird enough that any American judge would consider such a rule to be consistent with the First Amendment. Here, the Minnesota Supreme Court actually wrote the rule. But it gets worse: The United States Supreme Court overturned the rule by a vote of only 5-to-4. Incredibly, Justices Stevens, Souter, Ginsburg, and Breyer all disagreed - and argued in jaw-dropping dissent that the rule was Constitutional.

It's important to keep this kind of thing in mind when considering just how much (or how little) may preserve us from legal systems like those of Pakistan.

Nobody should be too comfortable.

Posted 12:10 PM by Robert

Caveat Emptor

Instapundit links to Red Skelton's comments on the Pledge of Allegiance, and the Man Without Qualities has no problem with that.

However, the linked site includes this:

"In addition to being an accomplished entertainer, Noble Red is acclaimed as one of his century's greatest painters. His original oil paintings are displayed exclusively at Center Art Galleries, Honolulu, Hawaii, where they have been received with great acclaim by art critics and collectors from all over the world. Evocative of a bygone era, Red's clowns are welcome guests in homes worldwide, where you are continually reminded that the appeal of these fine character studies knows no bounds. Collectors include the rich and famous and those for whom the ownership of a painting by Red Skelton is the fulfillment of a lifetime dream. Past ISCA President John Whipple has a number of original paintings."

Before acquiring any Skelton piece that passed through the Centers Art Galleries, readers may wish to keep in mind that Center Art Galleries was the perpetrator of a major art fraud, in which fake lithographs and prints (claimed to be by Dali and other famous artists) were sold as originals. The owners of the Center Art galleries went to jail, and the Galleries seem to have closed. But the outfit - and the phony "art" it sold - keeps popping up.

The government may have inadvertantly facilitated and expanded the reach of the fraud:

"The 12,000 fake Dalis and nearly 1,400 works attributed to Ernst Miro, Norman Rockwell and other artists that had been sezied by the government in its raid of Center Art in April 1985 and additional pieces seized in November 1994 went on sale at an auction conducted by Koll-Dove Global Disposition Services on October 21, 1995, in Belmont, California, to the consternation of much of the art world. Prints bore small stamps on the backs reading:

'COUNTERFEIT/UNAUTHORIZED/FAKE NOT A SALVADOR DALI WORK SALE OF THIS WORK AS AN ORIGINAL DALI PROHIBITED BY LAW.'

Sculptures bore a similar, but removable, sticker. The one-by-two-inch stamp did little to assuage those concerned about the Dali fakes' re-entry into the marketplace. 'This sale put the government in the position of being an accessory to future art fraud,' Colorado art appraiser Bernard Ewell, who testified for the prosecution in the Center Art trial, told The New York Times. 'It's sad,' added Constance Lowenthal, executive director of the International Foundation for Art Research in New York, 'that the government had to try to recoup its fine money by sending these fraudulent works back into the market, marked or unmarked, when Center Art Galleries' revenues over a period of many, many years exceeded the fine by a huge multiple.'"

Posted 9:36 AM by Robert

Supreme Court Allows Vouchers

A bare majority of the Supreme Court has ruled the Cleveland school voucher program does not put the government in the unconstitutional position of sponsoring religious indoctrination, even though more than 95 percent of the vouchers are used to subsidize Catholic or other religious schooling.

"We believe that the program challenged here is a program of true private choice," Chief Justice William H. Rehnquist wrote for himself and Justices Sandra Day O'Connor, Antonin Scalia, Anthony M. Kennedy and Clarence Thomas.

The complete opinion appears on the Court's website.

Posted 11:06 AM by Robert

Silly Putty

With some misgivings, the Man Without Qualities succumbed to the persuasive powers of the abode's Cub-Scout-In-Residence, and yesterday we took in an afternoon showing of the new Spielberg movie, Minority Report. As noted here previously, I was skeptical, expecting something obviously derivative of Blade Runner. I was wrong. Minority Report is not derivative of Blade Runner the way, say, The Mummy is derivative of the Indiana Jones movies. That is, the derivation process is not one in which the atmosphere and "look and feel" of the earlier movie is openly and shamelessly emulated.

But Minority Report is highly derivative of Blade Runner, and the process of derivation is at bottom not complex - although the technical effort in creating this movie was clearly enormous and enormously complex. The derivation process here is roughly similar to the way Silly Putty is used to copy an image from the newspaper (preferably, the Funnies), faded and stretched. The blanched color tones of Minority Report resemble those of a Silly Putty image, but there is much more than that. The transfer process turns Blade Runner's futuristic casbah - unrestricted by the moral or legal and dominated by monstrous, floating, Ginza-like, god-like commercial images - into a bleached shopping mall differing from those of American suburbia today only by anodyne advertisements tucked below the mezzanine level on what might be liquid crystal screens retrofitted circa 2050 onto the original 1970's structure. The scripts exhibit a similar degradation, with Blade Runner's featuring fine pop-classic lines (Question: "Is that a real snake?" Answer: "If this was a real snake would I be dancing in a place like this?" - approximate). There may be memorable dialogue lodged somewhere in Minority Report, but I can't recall any. Minority Report's busy, ridiculous urban "Mag Lev" transportation system seems like a grounded, less-effective version of the free-floating Blade Runner variety. And one can't help but wonder if the Mag Lev's disturbing resemblance to that wooden, gravity-powered slot-car system that occupies much of the Cub Scout's room is perhaps somewhat deliberately obscured by the movie's washed-out color scheme. Then there are the chase scenes, where the short, intense Blade Runner specimens are replaced by a flabby Minority Report variety that become increasingly unpersuasive and eventually terminate in an outright gag (Cruise drives away in a car that has been robot-assembled around him).

So what? These are stylistic matters. If Mr. Spielberg has his own sense of style and it entertains, then the movie succeeds on its own terms.

But, as Joe Morgenstern points out, Minority Report is very pale entertainment. But, unlike Mr. Morgenstern, I believe the movie fails to entertain for a very straightforward reason: Minority Report is constructed as a movie of ideas (as is Blade Runner), but unlike Blade Runner, Minority Report exploits ideas so weak that even Mr. Spielberg cannot and does not commit to them.

Although Blade Runner was made well before Ian Wilmut cooked up Dolly the Sheep, that movie centered on disturbing and entertaining ideas of identity, memory and science that either very much affect us today or are tantalizingly over the horizon. For example, the entire android-driven plot is on one level preposterous, yet Dolly the Sheep seriously raises the likelihood that science will be able to produce artificial, genetically-selected humans (that is, "androids") within fifty years - perhaps less. One of the androids - a beautiful woman - discovers she has "memories" in fact borrowed from her creator's daughter. This resonates with the hideous "recovered memory" phenomenon of recent years in which witnesses have put others, sometimes others close to them, in prison on the basis of "memories" later discovered to have been implanted by therapists. And how many of us have discovered that we harbor childhood "memories" of family events we later learn we could not have attended - the likely product of vivid recounting by those who did attend. Then there is the vision of environmental apocalypse that provides so much of the atmosphere - in any meaning of the term - in the movie. There is no question that Blade Runner is powered by many rich, dense, disturbing, vivid and highly entertaining ideas.

On the other hand, I, personally, would be more than ready to make book on the likelihood that the victims of any drug addiction wave - any drug at all - will leave behind a precognitive offspring. That prospect is not one that troubles my sleep or enlivens my days - and my guess is that is true of almost everybody else. Indeed, every day seems to bring more doubts about even our existing tools for predicting human behavior, never mind allowing possibly perfect predictive capability. The pseudo-philosophical questions that arise from considering what would happen if one thought one had perfect predictive capability for a type of human behavior such as murder but then found out the capability might not be completely perfect have as much intrinsic entertainment value as the questions posed by a hypothetical realization that a child on a tricycle that one thought would be able to shoot out of the galaxy might actually only get half way there. Just not that many people have ever been burdened by perfect or near-perfect knowledge of the future to really care about these matters. As I have noted before, the premise of Minority Report simply eliminates all of the interesting considerations involved in intelligence gathering and predicting human behavior. It's no wonder the movie has to rely on silly, overextended chases and mood-demolishing gags.

As noted above, even Mr. Spielberg does not believe in the entertainment value of this movie's ideas. The basic moral issue here is suppose to be: how does one justify punishing people for things they haven't yet done - in this case, murders that have not been committed. The movie opens with a sequence that is supposed to illustrate all this: the Pre-Crime Unit stops a husband from killing his wife and her lover. As he is arrested, he says: "I haven't done anything." This after we have just seen the Pre Crime agent literally pull from the husband's hands a pair of scissors he has raised to kill his wife's lover! Well, maybe Mr. Spielberg's writers need to read up a bit on criminal law, but if a real-world cop ever has to pull from one's hand scissors raised over one's spouse's cowering lover, one should not count on beating the "attempted murder" rap by arguing "I haven't done anything." The fact is, every person arrested by the Pre Crime unit in Minority Report could be arrested today by the Washington, D.C. police and charged with a very serious existing, real-world felony: attempted murder, conspiracy to commit murder and assault come to mind, but there are others. Here's another example: A man lures a mother to a lake with the intent of drowning her, using as the lure the promise that the mother's daughter will be returned to her. The man and the mother show up at the lake, and he starts to attack her. Does anyone think that man has not already committed a serious felony under current law?


Under current criminal law, every crime consists of two parts: a state of mind coupled with the commission of a prohibited act. There is only one situation in which the conceit of the movie diverges from current law: Where a person has either not yet formed the state of mind to commit a crime or has not yet committed any act in furtherance of that state of mind. Under current law, such a person could not be arrested or charged, but in the movie he could be if the Pre Cogs identify him as a future killer. That is a real issue, although for the reasons described above, not a very entertaining or interesting one. Mr. Spielberg seems to understand that, because he never illustrates such a case in his movie.

Further, Mr. Spielberg does not even seem all that interested in his Pre Cogs having the power of precognition. In the sequence in the shopping mall, for example, the Pre Cog Agatha seems to be more of a mind reader than a clairvoyant (she tells the protagonist that a person approaching can identify his face, which has nothing to do with predicting the future). Later, she fails to predict that the Pre Crime unit will descend momentarily on the protagonist until they are right outside the door. Maybe she has an on-off switch that someone keeps accidentally bumping.

Minority Report is not without its charms - first and foremost being Tom Cruise's amazing ability to do as much as he did with this material. He deserves much better. But maybe Mr. Spielberg should get to know Tiger Woods. Mr. Woods dramatically took a considerable period off to completely revamp his approach to golf at a time many people thought he was already the best golfer who has ever lived. He emerged better for the effort. Mr. Spielberg may want to consider where he is going with the likes of Minority Report and A.I. in his immediate past.

Posted 2:32 PM by Robert

Clueless In Houston II

The Wall Street Journal today presents a fine editorial on the government's disastrous prosecution of Andersen.

At its end the editorial makes a point which has been often made here:

"So the stage was set for a slam-dunk trial that became a pyrrhic victory. Last January I wrote that prosecutors shouldn't rest with some safe but technical case, that 'to satisfy what's on everyone's mind, they need to see whether they can make the case that top executives set out to steal from their shareholders.' Still waiting.'"

Yes. Aren't we all.

Posted 2:11 PM by Robert

Foreign Students Panel Discussion in Washington, D.C.

The Man Without Qualities has received by e-mail a Center for Immigration Studies press release stating that there will be a panel discussion Tuesday (tommorrow) June 25, at 10 a.m. in Room 2200 of the Rayburn House Office Building on a new paper by Harvard economist George Borjas. Readers are invited to evaluate the Press Release, panel discussion and Professor Borjas' paper with their own good judgment.

The Press Release reads as follows:

WASHINGTON (June 2002) -- The foreign student program has come under intense scrutiny since September 11. Not only did 9/11 hijacker Hani Hanjour enter on a student visa, but so did other al Qaeda operatives over the past decade, including the man who rented the truck in the first World Trade Center attack, a top al Qaeda recruiter in the U.S., and Osama bin Laden's business manager. A 1996 law required the development of a system to track foreign students, but university opposition prevented the system from moving beyond the pilot stage. The border security law signed last month by President Bush spelled out further requirements and deadlines for the system.

But a new paper from the Center for Immigration Studies argues that wholesale re-evaluation of the foreign student program is called for "An Evaluation of the Foreign Student Program," by Harvard economist George Borjas, argues that the seemingly sensible, and even noble, aims of the program mask the fact that it fails to serve the national interest.

Among Professor Borjas' findings:

* The total net gain to the economy from the employment of foreign students and foreign graduates is less than $1 billion per year.

* The 275,000 foreign students at public institutions alone receive a subsidy from U.S. taxpayers of about $2.5 billion per year.

* 73,000 U.S. schools have been certified by the INS to accept foreign students, about twice the total number of state-accredited colleges, universities, vocational, and high schools in the country.

Prof. Borjas' paper will be the subject of a panel discussion on Tuesday, June 25, at 10 a.m. in Room 2200 of the Rayburn House Office Building.

The speakers will be:

* George Borjas, Pforzheimer Professor of Public Policy at Harvard University's John F. Kennedy School of Government

* Rep. Tom Tancredo (R-CO), a member of the House Committee on Education and the Workforce, and chairman of the House Immigration Reform Caucus

* Terry W. Hartle, Senior Vice President and Director, Division of Government and Public Affairs, American Council on Education.

The full text of Prof. Borjas' paper will be on line the day of the panel discussion at www.cis.org.

For more information, Contact John Keeley at (202) 466-8185 or jmk@cis.org.

Posted 1:32 PM by Robert

Having a Wonderful Time...?

There is some expressed skepticism now emerging about assertions that al Qaeda has not been severely damaged.

However, there has not been any effort by the Administration to challenge such assertions and the related assertions that bin Laden and other al Qaeda and Taliban leaders are "alive and well."

It is understandable that the Administration would not mount a campaign to refute such assertions, since there is presumably some strategic and political advantage in emphasizing the immediacy of the al Qaeda threat. The assertions may also be consistent with - or at least not clearly inconsistent with - what the what Administration knows, and much of that knowledge is almost certainly not possessed by the public and the media.

But it is less understandable that the media have not pointed out some rather odd aspects of these al Qaeda assertions.

Specifically, if bin Laden and Omar are free, alive and well, why have they not released a single videotape of themselves which was unequivocally created in the last month or so? There are clearly doubts about bin Laden's continued health and even his existence - the al Qaeda assertions that he is "alive and well" were clearly released to address exactly those doubts. Such doubts must have a severe affect on al Qaeda morale.

But don't such public assertions made without confirming, recent videotapes of these two men just tend to reinforce the opposite: that bin Laden and Omar are dead or seriously sick or wounded? Why would al Qaeda not release such tapes if they could? And what would stop them from making and releasing such tapes if bin Laden and Omar are actually "alive and well," as al Qaeda claims Regular release of such tapes had previously been part of al Qaeda's standard operating procedure - why has that changed if not that the tapes simply cannot be made?

Posted 10:00 PM by Robert

New Smarter Harper's

The July 2002 Smarter Harper's Index is up.

Posted 12:34 PM by Robert

Minority of One Report?

Alone among the reviews I have seem of the new Spielberg movie Minority Report, Joe Morgenstern is savage [link requires paid subscription]- all the worse for Mr. Spielberg that Mr. Morgenstern's savaging obviously comes with great reluctance.

Some choice Morgenstern anti-blurbs:

Has Mr. Spielberg, one of the greatest entertainers in movie history, given up on entertainment? Though his movie wraps challenging ideas and ingenious visual conceits in a futurist film-noir style, it's pretentious, didactic and intentionally but mercilessly bleak in ways that classic noir never was.

"Minority Report " punishes our need for pleasure.

But what a sour and oppressive vision it turns out to be, notwithstanding a few exciting chases, some elaborate (though occasionally tacky) special effects, a haunting performance by Samantha Morton as one of the Pre-Cogs, and the sentimentality of a tacked-on coda.

Why does a Spielberg film that is a Spielberg film revel in such repugnant, assaultive images as a slovenly doctor performing eye surgery in a pigsty apartment?

The trouble with "Minority Report " is a conflict between medium and content, between an old impulse to entertain and a new desire to scarify.

On the long journey from "1941" to 2054, more has been lost than gained.

How many people would go to a movie with "it's pretentious, didactic and intentionally but mercilessly bleak!" on the poster? This review seems to expand on the old publisher's rejection letter: "Your manuscript is good and original, unfortunately ..." Does the existence of one such high-profile condemnation qualify this movie as opening to "mixed reviews?" Maybe that's just "generally positive reviews."

I am still withholding judgment on the film (I mean the movie). For one thing, I disagree with some things in this review, especially Mr. Morgenstern's statement that: "The story is so timely that the director and his colleagues might pass for Pre-Cogs themselves. It raises questions both momentous and of the moment, when we're struggling to reconcile civil rights with pressure for pre-emptive action against potential terrorists."

For reasons discussed previously, in all meaningful respects this assertion is dead wrong in my view.

And, more generally, I question if Mr. Spielberg, whose work seems to reveal a remorseless drive to extirpate all subtlety and nuance, can really be called "one of the greatest entertainers in movie history?" I don't question the wisdom of studios that hire Mr. Spielberg and rely on his judgment. And I'm not saying that high box-office receipts and high-gain cartoon-like effects don't have their place - but complete reliance on them also puts the director in his place.

Posted 11:49 AM by Robert

Options II

The predecessor to this post discussed a highly confused Thursday front page Wall Street Journal article by David Wessel:

"The article, among other confusions, repeats criticism offered now by many who should know better, including the Wall Street Journal."

Well, to the Journal's credit, at least its editorial page - which I understand is run by quite a different team than those who determine what goes onto the front page - does know better, and in large measure said so.

Indeed, the Journal's editorial page perhaps seems embarrassed by that front page article. While not expressly identifying that article, Holman Jenkins produced on Friday (the day after Mr. Wessel's effort appeared) a screed that repudiates much of Mr. Wessel's efforts in all but name [Mr. Jenkin's article has been reproduced in today's OpinionJournal]. For example, after coyly asking whether corporate venality has increased, Mr. Wessel casts off his pretense and says such venality has increased, offering a silly pat pseudo-answer:

"The answer, put simply: A stock-market bubble magnified changes in business mores and brought trends that had been building for years to a climax. The victims: the very shareholders the executives were supposed to be serving. .... [T]he abuses of the 1990s can't easily be dismissed as the fault of a few flawed human beings. "The professional gatekeepers were greatly compromised by finding they could make tremendous profits by deferring to management," says Columbia's Mr. Coffee. But not one of the instances of egregious abuse of shareholder interest could have occurred if the CEO had simply said, 'No!' The climate made it commonplace. The incentives were perverse. The watchdogs were sleeping."

So one can rather guess as to whom Mr. Jenkins refers when he writes:

"A mythology of the moment holds that law enforcement has been sleeping while white-collar criminals run amok. The mysteries of individual CEO behavior aside, there isn't much new in the news. Coming up soon are the trials of two top executives of Cendant, whose blow-up was the Enron of 1998. A surprising number of software, food and apparel executives are doing time already, unheralded on any news show. On a single day in 1999, the SEC brought civil actions against 11 CEOs and 57 other senior officers, including Fran Tarkenton, the former NFL god and head of a software company. (He settled for six figures without admitting or denying wrongdoing.)"

Seems like that "mythology of the moment" happens to be the very same mythology that appeared in Mr. Wessel's front-page article the day before. Mr. Jenkins also takes on some of the other myths Mr. Wessel repeats - such as the fiction of increasing CEO dominance of the board of directors. In fact, Mr. Jenkins adduces evidence that the balance may have swung too far the other way - with the CEO taking on a role more like that of a star athlete rather than a true leader.

Now the Journal editorial page should hire somebody to repudiate the even more dangerous myth spread by Mr. Wessel that executive options are always pernicious - a point Mr. Jenkins sadly does not address in his article.

Posted 1:54 PM by Robert

Enron Arbitrage

In a prior post the Man Without Qualities wrote:

[T]wo memos from Enron’s attorneys Stoel Rives ... and Brobeck have caused some fuss .... The Man Without Qualities has not commented on these memos (or the earlier story about a request by an employee of ISO, the State-created energy network, to Enron that it hike prices in at least one case in order to deny profits to a third party), because I have simply not been able to take the fuss seriously. For example, as Arnold Kling has pointed out, any sensible person ... who actually reads the memos should be left with the belief that the memos describe almost nothing but ordinary arbitrage moves decorated with silly names (Death Star, Fat Boy, etc). I agree with Mr. Kling. ... ...[E]ven the Stoel memo – described as the worst kind of “smoking gun" by Enron’s critics, such as Paul Krugman - quotes one Enron trader as describing one strategy as the “oldest game in the book” and then goes on to observe that “interestingly, this strategy appears to benefit the reliability of the ISO grid!” Does that sound like a "smoking gun?" The Brobeck memo is much more sophisticated and does much to explain why the Enron tactics did not amount to serious infractions. As Matt Miller put it: “[E]xperts parsing the details [of the “shocking memos] in court will show these practices are largely legal and common, they'll never work as a basis for getting California's money back.”

Since that earlier post, some very smart people with a lot of understanding of arbitrage economics have been studying Enron's activities, and some of them have posted the results of those studies on the internet, including Jonathan Falk, whose very interesting paper is summarized as follows on his web site:

In this paper the author critically examines the strategies cited as distorting the electricity market in California. Far from distorting the market, Mr. Falk finds that the majority of these strategies actually corrected potential distortions in complicated interrelated markets. He further concludes that to the extent that some of these strategies exploited market flaws to bring some of these markets out of alignment, there were obvious corrections available that policymakers should focus on rather than the futile, or at least unproductive, search for scapegoats.

The paper itself concludes:

[O]f the ten trading strategies cited by the memo, six increased market efficiency. There is no hint in any of the political invective that consumers and producers are clearly better off for the existence of the strategies named “Fat Boy” and “Get Shorty”. Other strategies, e.g. “Death Star,” had no impact on market efficiency at all. On balance, there is no evidence that Enron’s activities in California had any deleterious impact on electricity markets.

Posted 6:52 PM by Robert

Options

Today the United States stands at a point of prosperity almost inconceivable not only to our forebears, but to most witnesses to the economic decline and malaise of the 1970's.

The Man Without Qualities suggests keeping this observation in mind if one is subjected to talk about how American executive compensation, or capital markets or corporate governance "don't work as intended."

And when the talk comes in the form of a front page Wall Street Journal article [link requires paid subscription] on corporate honor with supporting quotes from Gordon Gekko and John Kenneth Galbraith, it is time, with apologies to Emerson, to count one's spoons in overdrive.

The article, among other confusions, repeats criticism offered now by many who should know better, including the Wall Street Journal [And at least the WSJ editorial page does! See Options II above.]. After framing the long-understood issue of the separation of ownership from corporate control with a quote from that trusted expert in corporate governance, Gordon Gekko, the article notes:

"The solution, widely embraced in American business, was to use stock options to link executives' and shareholders' interests. It sounded reasonable: Executives would benefit if they managed companies in a way that lifted share prices. It didn't work as intended. A soaring stock market rewarded executives not for good strategic management, but for riding the roller coaster. And when the stock price dipped below the exercise price -- essentially making the options worthless -- some companies simply revised the terms or, in Wall Street jargon, 'reloaded' them. Even worse, the incentives to do almost anything to increase the stock price were huge. And the incentives weren't to increase profits and share prices over a decade or two, but rather to increase profits -- never mind if they have to be restated later -- just long enough for executives to cash out, often without ever risking any of their own money to buy shares in the first place. Stock options, [Security and Exchange Commission Chief Harvey] Pitt says, were 'a device that was supposed to align shareholder and manager interests -- and actually disaligned them.' Not all executives were swayed, of course, but an ill-designed compensation system pushed them in the wrong direction."

Is this true? Must executive stock incentive plans create "incentives to do almost anything to increase the stock price?" Do options necessarily create incentives "to increase profits ...[that] have to be restated later?" It doesn't seem so. In fact, as with any form of compensation, the structure of the option package probably makes all the difference, and the WSJ reporter - David Wessel - may ambiguously suggest as much at the end of the above quote, but he is more naturally read as reporting that all executive option programs are "ill-designed compensation."

Consider two simplified stock option plans:

Plan #1 all at once gives executives a large number of fully vested options, immediately exercisable at the price the stock is trading on the grant date.

Plan #2 gives executives an even larger number of options, but they vest in escalating numbers in annual (or even semi-annual) installments and become exercisable at the time they vest and at the price the stock is trading on the grant date.

Plan #1 obviously creates some of the incentive described in the Wall Street Journal article. If the executives can get the stock price up, even for a moment, they can exercise, sell and get out rich. Does even this plan create a "huge incentive?" Well, if the stock inflation effort is a naked as the article describes, how about the little problem that to effect this scheme the executives probably have to engage in a criminal conspiracy. True, the conspiracy may be hard to prove and detect - but the downside risk is rather large (Leavenworth, fines and triple and punitive damages). Further, the collapse in a public stock price and a restatement of earnings are impossible to conceal. Although they do not themselves constitute actionable events creating claims against management, such public adverse developments, especially a post-exercise-and-sale restatement of earnings, certainly creates the basis for a civil class action and an SEC investigation. Once the action is filed, the plaintiffs have ample opportunity to explain to the jury why the plaintiffs think management "cooked the books to generally accepted standards," as Treasury Secretary O'Neill is quoted in the article. But if such a scheme succeeds, the payoff to management can be large - and some people will therefore take such large risks. But the considerations are vastly more complex than the trivializing assertions that stock incentive plans create "incentives to do almost anything to increase the stock price and "to increase profits ...[that] have to be restated later." And this is true even with respect to absurd Plan #1.

What about Plan #2? Suppose 100% of the options are granted the day the executive arrives, but only 10% vest then, with an additional 20% vesting on the first anniversary of the arrival, 30% on the second anniversary, and 40% on the third anniversary (a total vesting period longer than the life span of most internet companies). Suppose further that each year the executive receives a new batch of options exercisable at the trading price of the stock on the grant dates - and which vest in the same 10%, 20%, 30%, 40% sequence. If the executive manipulates the price at any particular time to a high that then collapses, not only does the executive run the risks described with respect to Plan #1 (but for a much smaller payoff), but the value of the portion of the options which vest thereafter will be impaired. In short, it is very hard to argue that Plan #2 create "incentives to do almost anything to increase the stock price and "to increase profits ...[that] have to be restated later."

The two stock option plans are simplified from those offered by most corporations. Many additional features can be included, especially relating to performance - of the company and of the executive. Each plan will create complex incentives that shift over time. Those incentives can be quantified using the same mathematical techniques used by, say, options traders to value those securities. The corporate board of directors should have such analyses performed.

Which leads to the real heart of the issue - not options, but boards of directors. The article says sweepingly: " One culprit was stock options , which gave executives huge incentives to boost near-term share prices regardless of long-term consequences. No CEO pay package seemed to strike any board of directors as too big." Well, if a board is going this route, options are the least of the company's worries. Certainly options can be used to gut a company in favor of its management - but options are hardly necessary for that. For example, the Enron board is accused (in part) of enriching the company's Chief Financial Officer the old fashioned way: selling pieces of it cheap to entities controlled by him. Whether or not the Enron board is culpable, the fact is that any board that is looking out for management rather than shareholders is big trouble. Options are just a tool - and, when properly used, they just happen to be the best tool for aligning the interests of shareholders and management that anyone has come up with. And anyone who tells you anything else is selling snake oil. Or, to put it another way, executive options are the worst way of aligning shareholder and management interests - except for all the others.

What about "reloading" - that is, resetting the exercise price of options that have become worthless? Well, this again is a tool - and it can be used for good or ill, if the board of directors cares to see the difference. First, most "reloading' is not accomplished by simply repricing at a chosen point in time - that is almost always destructive. Instead, most companies effect an exchange offer of new options for old, with the new options having an exercise price set at the stock's trading price, say, 90 days after the exchange offer is completed. this makes management bear at least a moderate amount of market risk.

Why would a company do that? Well, an example should make the answer clear. Consider MGM MIRAGE, the well-run gaming company. Following the disasters of September 11, gaming and hospitality companies, including MGM MIRAGE, saw their stock prices fall dramatically - this rendered many of the options of MGM MIRAGE management worthless. Did it make sense to charge MGM MIRAGE management with the consequences of September 11? Of course not. MGM MIRAGE effected an exchange offer like the one described in the above paragraph. This exchange offer was approved by the MGM MIRAGE board of directors - which is, of course, entirely determined by the company's largest shareholder: Kirk Kirkorian. Could anyone seriously believe Mr. Kirkorian didn't understand what he was doing or that the exchange offer was hostile to his interest as a stockholder? Of course not.

And the final irony in the MGM MIRAGE case is that by the time the exercise price of the new options was set, the MGM MIRAGE stock price had recovered - and management benefited hardly at all.

Posted 8:19 PM by Robert

Still Waiting For Big Mo


URGENT UPDATE!: Big Mo, YOU MUST MOVE FAST! The Minneapolis Star Tribune has already run an editorial blaming Terry Barton's husband for the Colorado fire!! Here's a choice excerpt:

"Whatever else John Barton is thinking about his infamous letter, and all the destruction and publicity attaching to it, it's a fair bet he's wishing he'd laid it in his own fireplace rather than the outgoing mail."

See, Big Mo, the moment threatens to escape you!

Look, you can play up the male insensitivity angle in a different way. Contrary to what the Star Tribune says about John, my guess is that he's home right now thinking something like: "That woman is buggier than a New York apartment. Thank God I moved out or she might have set me on fire!" Or some such unrepentant, insensitive thing of the male variety. But you must publish NOW. Already Kim Strassel at OpinionJournal is suggesting that Ms. Barton should be held responsible if she did what she is accused of! Don't let this happen, I implore you! YOU CAN CONNECT THE DOTS NOW, CAN'T YOU, BIG MO?!!

____________________________________________________________________________________________________

This is getting worse and worse. First the patriarchy conspired to hold without bail Terry Barton, the abused Forest Service technician who is accused of defying her estranged husband's letter by setting much of the State of Colorado ablaze. Now a federal grand jury has indicted her, saying she did it deliberately!

This is dreadful. Where is Anita Hill to extol what seem to count with a vengeance as Ms. Barton's "outsider values" with respect to insiders at the tired, male Forest Service. But most importantly, where is Maureen Dowd - "Big Mo" - to trumpet and defend this "plucky strawberry blonde" and call out all the GOOD women do in confronting male dominated organizations such as the Forest Service? Where is that masterly hand who writes of possible nuclear demolition of the nation's capital with "[b]oth the bad guys and the good guys are playing with our heads and ratcheting up the fear factor" in a way that deliberately leaves the reader thinking Mo believes that many "bad guys" work at 1600 Pennsylvania Avenue, extending her repeated deliberate suggestions that those she differs with politically are like murderous terrorists and the dictators who nurture them.

But with a very light touch!.

Come on, Big Mo. You owe it to Ms. Barton. This is her hour of need!

Posted 4:26 PM by Robert

Trickle Down Vice

The perceptive Matt Miller notes disturbing signs that a culture of corruption may be permeating the society from above.

His observations are interesting, although the general deterioration in at least certain types of personal ethics has been going on for some time. For example, it has been quite some time since comic books ceased to offer readers the chance to sell flower seeds door-to-door. At a fairly identifiable point in time the kids just stopped returning the money or the seeds.

And I have one quibble with his take: The examples he uses (recent tales of CEO payoffs, possibly felonious bishops, corrupt auditors, self-dealing stock analysts and a deranged Harvard policy of admitting students who have agreed to go elsewhere) are too new to be the likely basis of any mass learning.

However, eight years of the Clinton Administration's freewheeling manipulations of the truth may well have taken the toll Mr. Miller now detects. For example, Hillary Clinton is not questioned continually by the media about her $100,000 (in 1970's dollars - today worth much more than the $200,000 Martha Stewart's critics are talking about in connection with the ImClone collapse) overnight commodities market profits. Until she provides a satisfactory answer, why should the media not remind people that they are entitled to regard this United States Senator as likely having taken a bribe on behalf of her then-Governor husband? The passage of even more time did not dampen the media's recent enthusiasm for Watergate 30th-anniversary stories. That the media are not tireless with Ms. Clinton has allowed her to get away with offering no real explanation (her initial statements that she based her trades on Wall Street Journal information were promptly exposed as obvious lies). Again, the likely mass destruction and/or concealment of White House documents that probably occurred under the direction of White House Counsel Bernard Nussbaum following the death of Vince Foster was also a likely prolegomenon to the Andersen/Enron shredding effort. Then, of course, there was actual Presidential perjury on Bill Clinton's part - which has probably inspired millions of two-bit liars and executive crooks to persevere bravely.

But all of this really pales as a political matter in comparision with the 1992 Clinton presidential campaign, during which we now know the Clintons harbored a secret plan to remake the nation's healthcare system (over 15% of the economy), a plan which they denied having and refused to share with the voters even though that plan included what were arguably the most important facts in that campaign. Then, following the campaign, the Clintons' formulated their phony "medical care advisory committee" run by Hillary - knowing all the while that the committee's report would be ignored, since the real plan had already been chosen. When the terms of that plan were revealed, the Clinton Administration suffered a body blow - and it is reasonable to believe that if the Clintons had not lied to the voters by withholding that plan during the election, Bill Clinton would probably never have been elected. So the Clinton Administration from its inception was based on a breach of trust with the electorate.

The examples are more than examples. They prick out the destructive principles of the Clinton-Gore era. Indeed, some of the examples Mr. Miller cites may even have been informed and influenced by the eight-year spectacle of the Clinton's "getting away with it." For example, is it too much to wonder if the now-indicted former Tyco chief - and perhaps a whole generation of a certain stripe of corporate sophisticates - went to school on the Clintons' spectacularly successful shenanigans? And, of course, the current Harvard President behind the degraded admissions policy Mr. Miller condemns is Larry Summers - Mr. Clinton's very own Treasury Secretary, among other things in that Administration.

In short, I largely agree with Mr. Miller and the old Greek adage: "A fish rots from the head."

But the fish head here is likely and largely the well-coifed Presidential noggin of Bill Clinton: His particular, characteristic, enduring legacy.

Posted 11:54 AM by Robert

Second Thoughts on Soccer

On his way out the door, InstaPundit notes that "the print Wall Street Journal picked up InstaPundit reader Jorge Schmidt's emailed comments on Latin reaction to the U.S. soccer team."

For people who don't have a print copy of the WSJ and would like to see the a WSJ reference to Mr.Schmidt's soccer thought, a reference also appears in yesterday's (Tuesday's) "Best of the Web, which links to InstaPundit and notes: "Second Thoughts on Soccer .... Then again, maybe soccer will win us over yet. InstaPundit.com has a lovely letter from reader Jorge Schmidt." The letter itself follows.

Posted 9:32 PM by Robert

Blade Runner Redux?

In 1982 the movie Blade Runner opened to rather weak reviews, and did not do all that well in its first run. Over time, it has become the rare cult classic which is admired by much more than a cult audience.

While I will reserve judgment until I actually see it, I can't help but be struck by just how awful the new Steven Spielberg movie Minority Report appears from its pre-release publicity. Worse, to the extent reviews are available, they are enthusiastic. That's a problem because the best things described in the reviews seem to be lifted lock, stock and replacement eyeballs from Blade Runner. (Who could forget the Blade Runner scientist growing artificial eyes in the same clear, cold liquid in which he is murdered?)

Or how about this review excerpt:

"Longtime Spielberg cinematographer Janusz Kaminski's desaturated color pulls all the disparate worlds -- the scruffy streets, cold and gleaming interiors, magnetic highways and the womblike Pre-Cog Chamber -- into a dark, unified whole. As more aspects of science and crime-fighting in this future society emerge, the film probes the moral underpinnnings. The Orwellian nature of the new technology is obvious, but Spielberg see this less as the intrusion of Big Brother than Big Business."

Didn't Ridley Scott pull all those disparate worlds together twenty years ago?

Perhaps this Spielberg effort will be less derivative and less awful (stewed psychics?) than its publicity suggests. Perhaps the reviewers are correct.

But it is particularly annoying that the film seems at this point to be essentially Spielbergian Blade Runner redux - while the actual Blade Runner's first-run financial success was hampered by the success of a grossly inferior movie: E.T.: The Extra-Terrestrial.

POSTSCIPT: The similarities in the movies are not surprising. Blade Runner was based on science-fiction writer Philip K. Dick's 1968 novel, Do Androids Dream of Electric Sheep? Minority Report is based on an earlier short story by the same author. At this point, tt appears Ridley Scott chose earlier and better than Spielberg.

Posted 2:46 PM by Robert

Ticked Off in London?

UPDATE: Several erudite readers have written to tell me that in British slang, "to tick off" can mean "to reprimand, disparage, dismiss." So Ms. Smith's sentence means, "I have lost count of the times I have been reprimanded in recent months, sometimes by quite senior politicians, for suggesting that George W Bush is a complete idiot."

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Having innocently linked to one of those interesting quotes on the side of More Than Zero, I found myself reading the opening sentence in a standard-issue (if a little coy) "George Bush is stupid" article originally from the London Newspaper "The Independent":

"I have lost count of the times I have been ticked off in recent months, sometimes by quite senior politicians, for suggesting that George W Bush is a complete idiot."

Now, I realize this is a London writer, and British and American usage can differ. But I have never seen "ticked off" used in this way. In fact, I can't quite figure out what meaning it is supposed to have as it is used in this article.

At first I thought the writer - Joan Smith - was saying "I have lost count of the times I have been made angry in recent months, sometimes at quite senior politicians, for their suggesting that George W Bush is a complete idiot."

But Ms. Smith's sentence doesn't seem to say that. In fact, if one suppresses the parenthetical (", sometimes by quite senior politicians,"), the sentence reads: "I have lost count of the times I have been ticked off in recent months... for suggesting that George W Bush is a complete idiot." By my understanding of the normal rules of English grammar, this is what the sentence is supposed to mean. But that sentence seems to say that Ms. Smith many times made herself angry by her own suggestions that "George W Bush is a complete idiot,” which doesn't seem likely. After all, if she's making herself angry in this way, she can just stop making such suggestions - and there's no need to bring it to her readership's attention.

Then I thought that there might be one of those British/American nuances going on. Maybe Ms. Smith means that she has made uncountably many other people (especially senior politicians) angry ("ticked off") when she repeatedly suggested to them that "George W Bush is a complete idiot." But a quick and, admittedly, incomplete scan through the 25,400 responses to my Yahoo! advanced search under "ticked off" did not yield a single obvious use of the term with this meaning.

What to do?

Well, I still think that Ms. Smith means to say: "I have lost count of the times I have been made angry in recent months, sometimes at quite senior politicians, for their suggesting that George W Bush is a complete idiot."

But it is troubling that she expresses herself in what can only be considered "halting English." You'd think she'd be fluent by now.

Whatever it is that she's really getting mad at, it seems to be happening a lot.

Posted 1:04 PM by Robert

In Serum Veritas?

UPDATE: An alert reader writes to tell me that in Latin not of the pig variety, the title would be "In Sero Veritas."
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There's been a surprising amount of discussion of the use of torture over on the Volokh Conspiracy, unsurprisingly all of it a lot better than any contribution made by Harvard Law Professor Dershowitz, who had earlier used the topic to grab a little ill-considered publicity for himself.

The Man Without Qualities does not think he is smart enough to handle torture debates, and, frankly, finds the topic a little icky.

Maybe worthy, but icky. Like gastroenterology.

On the other hand, there is the interesting question of truth serum,, which is addressed in very sophisticated terms by E.V Kontorovich in his excellent OpinionJournal column today.

I know it may ultimately raise all the same issues as torture, but it doesn't make me feel quite so queasy. I'm sure not everyone will agree with either point.

Posted 12:41 PM by Robert

In the mean time, in between time, ain't we got fun?

Max Power crafts a wonderful criticism of a New York Times effort to show the rich basically absorb all the new prosperity.

Mickey Kaus takes on the same effort.

Mickey and Max had better watch out. Mr. Raines may get "uncomfortable" with them.

Posted 11:54 AM by Robert

Send In the Pre-Cogs

The ongoing dust-up over the state of the nation's intelligence services should bring home that we are forever condemned to make the best of a world in which nobody does or ever can know the future other than in very narrow categories, which we call "hard science," and then only in limited respects and under serious assumptions. Most people never forgot that, of course, but it is such an uncomfortable fact that most people care not to dwell on it either. The consequences of September 11 require quite a bit more such dwelling than most people are used to or comfortable with.

All the wrangling over how much evidence should constitute "probable cause" for a search warrant and similar intelligence issues are at bottom different aspects of the same question: How much can and should the government know before it can take action against an individual?

And this single question is forever troubled by two questions with only the most approximate answers: How is the government supposed to acquire the initial batch of evidence? What rules are supposed to be invoked to extrapolate from the evidence and patterns perceived in the past to guess at likely future events?

A movie which posits an intelligence service which employs in-house psychics (called "pre-cogs" in the movie, perhaps to distract the viewer from associations with Miss Cleo) who are never wrong about the future is therefore irrelevant to everything raised by September 11 and the aftermath, right?

Not to Steven Spielberg. The publicity for his new movie "Minority Report" aims to prove that it was with September 11 that psychics (excuse me, "pre-cogs") really came into their own:

"Tom Cruise plays John Anderton, top man in the Justice Department's Pre-Crime unit. His job is interpreting the visions of crimes yet to be committed that are fished out of the extra-sensory perceptions of a trio of so-called Pre-Cogs, psychics nurtured in a flotation tank, whose soothsaying has never been proved wrong. Pulling together their fleeting premonitions like a conductor taking an orchestra through the score, Cruise and the cops zero in on the criminal - like the crime passionel in the film's "overture," foiled with seconds to spare before a jealous husband can knife his wife and her lover."

See, the Bush Administration is moving to emphasize prevention of terrorist attacks - and Spielberg's movie is about police who emphasize prevention of crime by using psychics (I mean, "pre-cogs"). So, according to the studio execs and the buzz they're stirring up (especially through Matt Drudge, it seems) IT'S ALL PRETTY MUCH THE SAME THING! I guess it's just supposed to be a detail that the Administration wants to prevent future attacks by holding people accountable for things they have already done (like conspiring to effect those attacks) where the movie is said by its publicists to be about holding people accountable for things they have not yet done or even thought about doing.

Can't blame a boy for trying.

The movie police even “bug” buildings with little robot spiders that look into the occupants’ eyes while they’re having sex! Hey, practical nanotechnology! Glenn, take a look!

Posted 12:57 PM by Robert

Waiting For Big Mo

For some reason it has become common for columnists, mostly women and mostly liberal and silly (Maureen Dowd – aka the Big Mo), but occasionally conservative and substantive (Peggy Noonan), to wonder out loud at just how much GOOD women suspended in "male-dominated" systems do. Coleen Rowley (the woman who wrote the FBI memorandum) and Sherron Watkins (the woman who wrote the Enron memorandum) are only two recent examples - but Ms. Dowd especially can tell us about so many more.

Now, just what can U.S. Magistrate Michael Watanabe and U.S. Attorney John Suthers be thinking by trying to keep Terry Barton, the Forest Service technician who burned down half of Colorado, in jail without bail?

First of all, don't they realize that they are both men? This obvious act of male supremacy and jealousy over a feisty female seizing the quintessentially male image of FIRE will not go unnoticed or unpunished. For God's sakes, couldn't they at least have found a female Assistant U.S. Attorney to argue the matter before a female magistrate? Messrs. Watanabe and Suthers should each be required to see "Divine Secrets of the Ya-Ya Sisterhood" ten times and read every Maureen Dowd column published this year five times just to obtain absolution for their egregious new-age sin.

Now it's true that burning thousands of people out of their homes and casting an entire state into chaos is not entirely civic minded - but need I remind the authorities that we are talking about something provoked by a letter from an estranged husband?! And don’t they “get” that Ms. Barton was burdened, even righteously maddened, by having to work within the male-dominated Forest Service?! The woman was obviously abused by men. Surely Ms. Dowd will be able to whip up a little "Thelma and Louise" perspective on this one no lo sweatto.

Let's just get one thing straight: Women are responsible for everything good that has ever happened in the world (heads up, Mr. Vermeer, I'm talking to you), except that women are absolutely never, ever responsible for their own actions, especially when there is an estranged husband skulking around. Jeez - every right-thinking pop feminist knows that Russell "Rusty" Yates was the one really responsible for killing the Yates children - and that Andrea was obviously insane, which made "her incompetent to stand trial. Texas criminal law on insanity as a defense [being] illogical and archaic and an embarrassment to a progressive society." And don't forget that Andrea had a male doctor. Didn't Messrs. Watanabe and Suthers learn anything from that miscarriage of justice?

It's incredible that one has to keep reminding people about such obvious things.

But surely the Big Mo will give it a try this time, too. I can hardly wait.

UPDATE: Some people are already getting into the spirit. The New York Times reports a Colorado couple had this reaction to Ms. Barton:

"Bob and Leeann Cunningham ... are evacuees from Indian Creek, a subdivision well southwest of Denver. She was willing to sympathize. He was not."

"'I feel sorry for her,' Mrs. Cunningham said. 'You can't be mad at her.'"

There. That's the ticket. Big Mo, take note.