Posted 7:54 PM by Robert

Would That Which We Call a “Lawyer” …?

For years, many heads – often what seem to be the wisest, grayest heads - have shaken at the observation that Japan has proportionately far fewer lawyers than the United States has. Derek Bok (former President of Harvard and former Dean of Harvard Law School) seems to have given this concern a big boost in a widely reported speech he gave years back. Many people have used the observation for many purposes. At one time, this supposed scarcity of lawyers – and a corresponding abundance of engineers – were cited as a sign of Japanese strength. Now that an increasing number of Japan observers are concerned that the country may have developed the national economic equivalent of Lou Gerhig’s disease (see, for example various Japan-related Lagniappe posts), it is perhaps worth revisiting the issue.

Is the observation correct? Well, as Churchill would probably have rather died than say: "Japan is a mystery inside a misleading bank accounting entry, served in an interminable tea ceremony." Or, put another way, it depends a lot on what one means by a “lawyer.”

In Japan, as in many places in the world, law is an undergraduate degree. The United States is a major exception. But, for example, most practicing attorneys in Great Britain hold only undergraduate law degrees. They receive further training with law firms.

The Japanese graduate a roughly proportional number of people with law degrees as the United States does (undergraduate degrees in the case of Japan, graduate degrees in the case of the United States). But a large number of those Japanese law students have traditionally entered corporations directly out of college, where they are further trained and function as "in house" attorneys. They draft contracts, conduct legal negotiations, give legal advice to company executives and provide many other legal services.

But unlike the United States, in Japan such in-house company legal operatives aren’t required to, and don’t, ever join the official professional bar. And such “in-house” attorneys are therefore not included in most international comparative counts of attorneys. These are the counts they lie at the base of President Bok’s observation.

One might view the Japanese system and the international counts as unintentionally creating the illusion that there are fewer lawyers in Japan. It’s a kind of tea ceremony. Those “in-house” Japanese lawyers are “real” lawyers, too. If they were added to the counts, Japan and the United States would have roughly proportionately many lawyers.

Are these “in-house” legal operative “real” lawyers? That’s hard to say. I would not want to argue that British solicitors – among the cleverest and most competent providers of legal services in the world - are not "real" attorneys, merely because they work from undergraduate law degrees supplemented by “in-house” training in law firms. Japanese corporations seem to do quite well at training their representatives. Nor would I want to have to argue that an American “in-house” lawyer who gradually assumes more and more “business” functions as he or she progresses through a corporate career does not remain a “real” lawyer (or, as one of them described himself to me, a “recovering lawyer”). So I wouldn’t want to characterize a Japanese corporate legal operative as not a “real” lawyer just because he (almost always “he”) provides lots of business services, too. Beyond that...?

What is clear is that the official professional bar in Japan is proportionately much smaller than its counterpart in the United States. The Japanese admit fewer than 1,000 people a year to the bar. And only members of the bar may appear as legal representatives in the Japanese courts.

Many Japanese people DO have a lot more trouble suing in court. And that seems to be correlated to the scarcity of members of the bar. So, in Japan, if one’s daughter, say, is run over by a car, one is likely to hire a GANGSTER to extort compensation from the perpetrator. If he won't pay, your gangster maims him or his property or family. The Japanese present this to the world as a "less confrontational" system. "Asian values." I personally find a system in which gangsters directly compete with attorneys to have a certain naked charm.

Curiously, there now appears to be some sense “in the air” in Japan (at least among some Japanese legal academics) that there are now just not enough “official” lawyers, and that this is a drag on the Japanese economy. There is even word that the Japanese government may want to vastly increase the number of members of the official bar to address this “problem.” As with so many things involving Japan, all of this is difficult to evaluate – even to determine its truth.

But given that Japan and the United States have approximately proportionately as many people providing legal services, it is hard to believe that a scarcity of “official” litigators is exerting any significant drag on the Japanese economy – or that the Japanese government could believe such a thing. But that doesn’t mean the government doesn’t have its own plans.

Posted 5:23 PM by Robert

How Many Were “Misled” and For How Long?

Many have claimed that the sharpest minds on Wall Street were misled by Enron’s financial statements. The following excerpt from the October 19, 2001 Reed Wasden Research weekly sector report indicates that Reed Wasden Research was “extremely skeptical” of Enron’s prospects even before October, 2000:

"For over a year now, Reed Wasden Research has warned investors to beware of Enron. We have been extremely skeptical of the company's future earnings and growth potential."

"Since November 2000, we have been cautioning Enron investors that the emperor has no clothes."

"What is clear from the P/E chart . . . is that the reason for the stock's volatility and 'bubble' was not the strength of its earnings but how investors perceived and valued those earnings."

"We believe Enron has lost investor confidence in management, the business model, and transparency of earnings. Management is clearly involved in a corporate clean-up which is likely to take a couple more years, resulting in a string of write-offs. Proceeds from pending asset sales will need to be used to pay off debt, and get the company's asset position back in shape. We believe Enron's stock will no longer trade at a premium to its peers. We also still believe there is a potential downside for the company as it negotiates what will surely be a difficult restructuring period.

"Likely catalysts that would cause us to review our position on the company would be: 1) full disclosure of trading operations that will illustrate actual trading revenues and EBIT, separated from sales of physical assets; 2) a clear strategy from management of how they will focus the business going forward, including exactly what assets will be rationalized and why such actions are in line with their strategy; and 3) more complete development of their expansion plans in Japan."

"We believe the company continues to fall short of any level of meaningful financial disclosure."

Posted 12:05 AM by Robert

One Must Move With The Times

With the Shays-Meehan-McCain-Feingold ersatz campaign finance reform bill lodged high in the Congressional agenda, it’s worth considering the often-asked question whether Big Media favor campaign finance reform because it would make them more powerful.

The argument is well summarized by Jonah Goldberg: “If you make it difficult or illegal for interest groups (a.k.a. American citizens) to express themselves through paid ads during campaigns, you necessarily make the media more powerful. …The coastal media do a pretty good job of getting their message out already.”

Jonah argues that this is just not how the issue is framed in “the minds of the top 1,000 media bigwigs.” He says that “conspiracy theories about the media fall apart, because journalists are neither that smart nor that devious. For the most part, the elite media support campaign-finance reform because it sounds like a good idea to them. Period. … But — and this is the important but — the reason they don't see that bans on issue ads are bad, for example, is that their ox isn't getting gored.”

True, Jonah, as far as it goes. But it doesn’t go very far.

Yes, journalists are neither that smart nor that devious, and in a few Big Media companies editorial policy probably lies close to the journalist level. There is, for example, no evidence that General Electric sets NBC news policy in any significant way, Henry Waxman’s preposterous post-election flame out about Jack Welch’s “interference” with NBC News election coverage to the contrary notwithstanding. Before his departure, Jack Welch was questioned about NBC News editorial policies at shareholder meetings, and dismissed the question with the observation that the entire NBC news division was “too immaterial” to GE as a whole to be worthy of his time. Welch may have been concealing his reasons for remaining removed from NBC editorial policy, but it seems that GE management did and do, in fact, not involve themselves.

But the relevant decision-makers at most Big Media companies are often not journalists. The Washington Post and The New York Times, both nominally public companies, are also both family run by highly involved owners. Could anyone seriously maintain that in the long run any chief editor at either of those companies could long veer from the owner’s point of view on a matter like campaign finance reform, surely one of the defining media topics of the day? Newsweek, a Post subsidiary, will also follow its master’s voice. There is nothing sinister about media owners expressing themselves through their properties, especially on the macro issues – that’s part of the fun of ownership and in the case of these companies it’s clearly a fact. While Disney is a true public company in the sense that there is no involved, dominant owner, its board of directors has for years been a notorious kennel of Michael Eisner lapdogs. Further, Mr. Eisner is a micro-manager to an embarrassing extent, even extensively sitting in on movie productions and the like. It obviously behooves an ABC talking head or other journalist as much to determine and emulate Mr. Eisner’s views on a topic of this significance as it does for the “head” or journalist to deny that Mr. Eisner (or Messrs. Redstone or Levin, as appropriate) is determining editorial policy from above. But one would have to be naïve to believe that the Mr. Eisner doesn’t make sure that at least the big issues line up his way at ABC. He’s just like that. Viacom and AOL-Time Warner (at least prior to Levin’s still mysterious implosion) show serious signs that editorial policy is considerably influenced by the views of the highest reaches of the corporate group. The case of CBS is complex, since Dan Rather is an inherited prince who by reports is unlikely to feel any need to cultivate higher management. But this is irrelevant to higher Viacom management in the case of campaign finance reform, since Rather’s views seem to align themselves with what appears to be the positions of Viacom’s management.

So in much of Big Media, the ultimate arbiters of editorial policy (and, for the purposes of this post, I'm including newsreportage emphasis, "spin" and "slant" as part of "editorial policy" - although I am well aware that they are quite separate in operation) regarding macro topic like campaign finance reform are probably the corporate majordomos – not journalists. Of course, this is not to say that the majordomos are editing copy in the news divisions or calling individual reporters to account for particular stories. And remember, the above discussion pertains to editorial policy – in the area of current lobbying and legislative policy the journalists have no role. Corporate operatives, not journalists, already handle those.

Unlike journalists, corporate majordomos are that smart and that devious. That’s how they got to be majordomos. For example, say what one will about their failings, people like Sumner Redstone, Michael Eisner and Gerald Levin have never been accused of lacking smarts or deviousness - which is not equivalent to saying that they are bad men.

On the other hand, there is no particular reason for corporate majordomos to be gifted or not gifted in understanding major national Constitutional power shifts – it’s just not something that comes up that often or that critically in one’s growth from minordomo to majordomo. And passage of a campaign finance reform bill which effectively suppressed the ability of non-media private parties to use their accumulated wealth to lobby and influence voters would certainly constitute a major national Constitutional power shift.

Where would such legislation lead Big Media? It is hard to say, since prior laws supposedly passed as such “reform” have not had much of their putative intended effect. But I don’t think it would lead to the Big Media as we know it acquiring the kind of power its majordomos may hope for – and which the critics of campaign finance reform fear.

But it’s fairly obvious that a new Big Media would acquire exactly that kind of power, and that is something the current crop of majordomos may or may not understand. If campaign finance reform effectively suppressed the ability of non-media private parties to use their accumulated wealth to lobby and influence voters, then ownership and control of the Big Media companies would immediately become essential to every major economic interest group in the nation. For example, MicroSoft – which long disdained purchasing political influence in Washington but is now a major employer on Gucci Gulch – would really only have one option: it would HAVE TO acquire a Big Media company, or several of them. It would be completely immaterial whether such an acquisition was economicly rational in the sense that the acquisition price square with the potential profits of the acquired company. MicroSoft would be protecting itself. And it would not be alone. Big Oil. The automotive industry. The Unions. All of them - by hypothesis - would suddenly have only one way to reach the voters: control of Constitutionally protected media. It would not be pretty.

It is highly unlikely that the current management of any of the Big Media companies would survive the wave of corporate merger and acquisition activity passage of such legislation would trigger. Disney is already an undermanaged mess. So is AOL-Time Warner. Even GE’s stock has swooned. There would be no question of whether these companies were “in play” – they would be acquired for the very purpose of replacing their management.

Nor would the family run companies likely survive, they couldn’t be allowed to. Somehow or other, a way would have to be found to eliminate the Sulzbergers of the nation and their like. There would simply be too much at stake. If it were even necessary to trump up criminal charge against The New York Times or its management, for example, that would happen. But these companies can probably be knocked off by some strategic decisions in by the Federal agencies - a few nasty findings by the labor department, for example, should be enough to take care of the Times. It would have to happen. It is simply not the case that every commercial interest in the country is going to let a little company like The New York Times control an information spigot while everyone else is prohibited from using their wealth to influence a political system that has absorbed so much of the nation's economic decision making through the Federal regulatory process. For the record, I am not urging these repercussions on the system. I just report the news (and the prediction of repercussions); I don’t advocate it.

Most of Big Media is not protected by the First Amendment. For example, GE is a major defense contractor as well as the owner of NBC. There would be huge incentives for political operatives to influence the editorial policies of the Constitutionally protected components of Big Media companies by applying government pressure to the unprotected components. There would also be pressure to appoint Federal judges sympathetic to restricting First Amendment protections.

Ultimately, if such “reform” legislation stuck, the economic incentives to restrict the reach of the federal government would likely enormously increase. After all, what makes regulatory agencies tolerable to the regulated interest is their ability to capture those agencies when the fuss settles. That would all be eliminated by “true reform”.

But the regulatory state can only shrink so much. What happens then? The economic incentives to affect government will never go away. Wealth is like a river – dam it up in one place, it finds another. And the obvious place for wealth to go is corruption.

Further, if you have wealth and you want to use it to affect the government and the law won’t let you do it, then you do it outside the law. Simply put: If monetary influence on government is criminalized, only criminals will have monetary influence on government. Almost a bumper sticker!

So, it comes to this: “True reform” would probably result in a great scramble to acquire and hold influential media in defiance of “rational economics,” with the resulting ejection of all current Big Media management as well as the destruction of any significant family-owned media. The Regulatory State might shrink somewhat, and corruption greatly increase – if corruption increased enough it might not be necessary to shrink the Regulatory State.

All of this would be ironic. But irony is cheap in politics, so I wouldn’t make too much of it.

Posted 11:38 AM by Robert

Unindicted [Vast] Co-Conspirators

It appears that a consistent, or "cross-county," adherence to belief in the vast Enron conspiracy being marketed by much of the media, and some of the more opportunistic politicians, requires one to accept that at least the following entities knew about much of the alleged Enron (or Enroid, in the case of Enron-like products or partnerships created by or for, or marketed to, companies other than Enron) nastiness, but kept quiet (the list does not include the many individuals included in each entity whose lives will likely be wrecked by their involvement):

Enron
Alliance Capital
Vinson & Elkins
Kirkland & Ellis
Milbank Tweed Hadley McCloy
Shearman & Sterling
Donaldson, Lufkin & Jenrette
Deutsche Banc Alex. Brown
Goldman, Sachs
Merrill Lynch & Co.
First Union (now Wachovia)
Lehman Bros.
Credit Suisse First Boston Corp.
Citigroup Inc.
Deutsche Bank AG
J.P. Morgan Chase & Co.
CIBC World Markets unit of Canadian Imperial Bank of Commerce
El Paso Corporation
Williams Companies
TXU Corporation
Arthur Andersen
All other accounting firms, investment banks and law firms
representing anybody in any Enron or Enroid transaction

And this after Gitmo has filled up! What will the Feds DO with the bodies?

Posted 8:41 AM by Robert

The Emerging Murkfare Market

Mickey Kaus has a revealing article on the growing Beltway market in conflicts-of-interest. The article gives a glimpse of how the current "campaign finance reform" bill in Congress will amount to a kind of partial privatization of the Federal political system in the hands of Beltway operatives.

Enron's time had not yet come! It attempted to create markets in deregulated electricity, broadband rights, and other such prosaic commodities. If only they had seen the future lay in the high-value-added trafficking in conflicts-of-interest, like the savvier Washington lawyers! But, then, there's no money in the stuff you can put in the media or on the trading room screens. So where are the "girls"?

Update

This post is by no means intended to suggest that KausFiles does or does not share any opinion expressed here. KausFiles is more than capable of expressing his own views.

Posted 6:42 PM by Robert

Always scribble, scribble, scribble!

Since this blog began, some people have asked whether its author has actually read the entire novel after which it is named. I can only plead that the wonderful novel The Man Without Qualities spreads itself out like Greenland on the map! I have read the entireties of both English translations of this great work. Indeed, my spouse says it was a main reason for the marriage. The book in either translation is wonderful, almost miraculous.

But the novel never ends. For that matter, its first chapter is titled "A Sort of Beginning." My namesake is said to have mused that he intended to finish it with a comma.

Instead, it sort of ends in a great and increasingly tentative and unknowable wilderness of drafts, notes, inspired excerpts and alternative versions. Much of this material has never been translated from the original German, which, alas, I do not read.

As noted, there are two translations. The first translation appears as three volumes, while the second, which includes vastly more material than the first, is presented in two Brobdingnagian tomes which bring to mind the comments of William Henry, Duke of Gloucester, upon receiving the second volume of Decline and Fall of the Roman Empire from its author in 1781: "Another damned, thick, square, book! Always scribble, scribble, scribble! Eh! Mr. Gibbon?"

Unlike the Proust effort with which it is sometimes compared, The Man Without Qualities does not dwell all that much on memory. This might or might not be taken as a plus. As Oscar Wilde expressed it in The Importance of Being Earnest:

CECILY
I keep a diary in order to enter the wonderful secrets of my life. If I didn't write them down, I should probably forget all about them.
MISS PRISM
Memory, my dear Cecily, is the diary that we all carry about with us.
CECILY
Yes, but it usually chronicles the things that have never happened, and couldn't possibly have happened. I believe that Memory is responsible for nearly all the three-volume novels that Mudie sends us.
MISS PRISM
Do not speak slightingly of the three-volume novel, Cecily. I wrote one myself in earlier days.


Where Cecily speaks of a diary perhaps we may be allowed to refer to a blog.

Posted 5:25 PM by Robert

Bill and the Great Idea
(d'apres Jack and the Beanstalk)


Bill Clinton likes to talk about big ideas, great ideas. For example, in a recent talk on Long Island, Mr. Clinton said that advances in transportation and technology have made the world increasingly interdependent, and vulnerable. "That's really what September 11 is all about." Clinton said.

A visionary.

Yes, while the dust is still settling on his successor’s invasion of Afghanistan and Mr. Bush gathers momentum to militarily address Iraq, Mr. Clinton - apparently not aware of the unintended hilarity of his musings - explained that during his administration a "standing contract" between the CIA and groups in Afghanistan would have authorized and paid them if they had succeeded in arresting or killing Osama bin Laden.

"I always thought this guy was a big problem," Mr. Clinton said. "I do not believe based on what options were available to me I could have done much more than I did."

Isn’t that nice? Mr. Clinton took out a contract on bin Laden! Mr. Clinton says that was all that he could do. Of course, nobody in the audience seems to have been so ill bred as to ask what more, exactly, Mr. Clinton had tried to do. What would be the point of such a question?

As to the future, Mr. Clinton was not shy about second guessing Mr. Bush’s plans. "It would be a mistake in my judgment to spend all that we have to spend in the war against terror on defense and homeland defense, and spend nothing the way General Marshall spent it to build a world with more partners and fewer terrorists."

Yes, Mr. Clinton loves talking about big ideas, great ideas. They are props for him. They help him burlesque his intellectually vain listeners, which includes most academics and journalists - and those listeners carry his water to the rest of the populace. Yes, by all means, a Marshall Plan! Great idea! Of course, the Marshall Plan contemplated the reconstruction of a previously industrial region which clearly already contained all the human and intellectual capital necessary to sustain such a society. Afghanistan has none of that. What Mr. Clinton is proposing looks more like "foreign aid" from the 1960's - not the GREAT MARSHALL PLAN. But don't quibble during the speech. After the speech, while the stage lights are still warm, the great ideas are already back in the box.

How can this have happened? How can such a man have been so successful in advancing himself?

The book from which this blog’s name is borrowed includes the following observation: “There is no great idea that stupidity could not put to its own uses; it can move in all directions, and put on all the guises of truth. The truth, by comparison, has only one appearance and only one path, and is always at a disadvantage."

As was the case in his Long Island address, Mr. Clinton’s rhetoric often has a vast, amorphous sense to it. His language is often like a heated but insubstantial gas expanding outward without boundaries, or a crystal growing in all directions through assimilation of whatever it contacts. This is surely the rhetoric of stupidity.

Mr. Clinton is likely the first President to exploit systemically the full potential of stupidity. In light of the above quote from The Man Without Qualities, it is not surprising that Mr. Clinton is wary of truth as a concept. He observed in an earlier Georgetown address: “This [post-September 11] battle fundamentally is about what you think of the nature of truth, the value of life, and the content of community. You're at a university which basically believes that no one ever has the whole truth, ever, because you're human." Truth! The big idea, the great idea. And yet, it is just not correct that bin Laden asserts that he knows the “whole truth,” whatever Mr. Clinton means by that. Bin Laden doesn’t need to know the “whole truth” – he just needs to be convinced that he knows enough of the truth to disagree with the West violently. But, given bin Laden’s current standing, Mr. Clinton can be assured that his audience will be sufficiently stupid to let him get away with this excess. After all, who will stick up for bin Laden?

But why this unnecessary focus on the “whole truth”? Nobody else was or is talking about the danger from the “whole truth”. Bin Laden’s videotapes don’t show him saying that he will get us because he knows the “whole truth.” Terrorist groups are not notably prone to ramble on about their possession of the "whole truth."

Where does one hear the phrase the “whole truth”? Well, it’s in the oath one takes before testifying. “I promise to tell the truth, the whole truth, and nothing but the truth, so help me God.” Let us remember that Mr. Clinton is the President who committed perjury by violating this oath. He didn’t tell the “whole truth” – or the truth at all. And it bothers him that his cherished “legacy” is seriously tarnished by his perjury. So he tells us “no one ever has the whole truth, ever, because you're human.” The big ideas, the great ideas are trotted out putatively to criticize bin Laden and put him in some grand perspective - which as usual with Mr. Clinton, goes nowhere. But his effort does take on the aspects of a shabby effort to justify his own perjury, cloaked in the amorphous rhetoric of stupidity. Where once we had a pseudo-philosophical wordgame about "what your definition of 'is' is," now we get a phony meditation on "WHOLE THRUTH."

And his audience is stupid enough to let him get away with it. As Schiller put it, “Against stupidity, the Gods themselves contend in vain.”

Mr. Clinton commands a formidable weapon. The man's not stupid.

A Sort of Update

"Dogbert, do you think love is the strongest force in the universe?"
"No, I'd have to go with stupidity."
"But love is in the top ten, right?"
"It's fourteenth, right after foolish optimism."

-- Dilbert

Posted 12:50 PM by Robert

Wise Old Europe

During the cold war, Western European countries deflected criticism that they spent far less, as a percentage of their gross domestic products, on defense than did the United States with a curious argument: Because it is more threatened by the collectivist propaganda of the Soviet Union, Europe must spend vastly more on welfare programs to avoid the growth of internal European sympathy for the Soviet system among the intellectually vulnerable working class. There are therefore necessarily fewer resources remaining for defense - the argument continued - but this is not objectionable because in Europe such welfare spending IS essentially defense spending.

Whatever truth (if any) this argument held, its neat conflation of defense and welfare priorites was never significantly made in the United States. Indeed, most Americans aren't aware that this argument was routinely passed by and around Europe as serious stuff - but it was.

That the argument represented a typical European shell game with many shells and no pea was, of course, revealed to any who cared to notice at the conclusion of the cold war, when European defense budgets diverged even further from American expenditures. The Europeans quitely stopped making that argument.

With the passing of the Soviet threat, and an even more profound discrediting of the Soviet economic system, the Europeans needed to shore up their willful insistence of passing their defense buck to the United States. They seem to have chosen "American unilateralism" as the surrogate, an inherently unstable posture which requires them to criticize in increasingly strident tones the very country they are counting on to foot their defense bill. Further, the advance of European cultural homogenization and political integration makes the European "unilateralism" argument increasing absurd - as has been discussed here before.

But Europe's prior long term reliance on the almost equally absurd "our-welfare-IS-defense" argument should indicate that the problems in Europe are far deeper and go back much further than any dissonance emerging from the current War on Terror (a la Chris Patten). The Cold War threatened to consume Europe utterly, so there was always much more at stake there than there is in the War on Terror or in any hideous event - even the inevitable event in Europe - this War seeks to head off. But the European political systems never faced up even to the realities of the Cold War, preferring the comforts of specious argumentation, which the United States allowed them to do. There is no reason to believe that they will ever do any better in the current setting absent implacable American insistence.

One cost to Europe of its expanding dependence on ever more absurd and intellectually dishonest rationalizations is, of course, ever growing irrelevancy, as noted for example by Irwin Stelzer in The Times. But Europe's irrelevancy is not a sufficient consequence for its unspeakable and long-term irresponsibility. More should be done.

Posted 11:01 PM by Robert

Pandemonium at the SEC

According to the Washington Post, a remarkably telling comment escaped a few days ago from Arthur Levitt, the former chairman of the Securities and Exchange Commission: "The business community now looks at things in terms of what they can get away with, not what is right."

In other words, Mr. Levitt, the Federal government’s chief securities enforcer for eight years, now tells us that he actually believes that the entire business community is a bunch of crooks. His comment helps explain why the securities markets may have gone so far off track on his watch.

The basic tenets of “community policing” teach that the police must establish rapport and sympathy with, and an understanding of, the policed community. A police officer who thinks the entire community is criminal is simply incapable of enforcing the law, and a real menace to that community. It is a question of the proper application of finite resources. There can never be enough resources, nor should there ever be enough resources, available to any police authority to put almost EVERYONE in jail. It is perhaps the most basic part of a police officer’s job to understand that criminals are always a small minority. That understanding is absolutely necessary if the officer is to have any hope of telling the criminals from the law-abiding citizens. If the police can’t tell the criminals from the law abiding, then law enforcement is doomed to fall unjustly on the innocent as well as the guilty, eventually resulting in widespread contempt for the law. All of this is as applicable to the Securities and Exchange Commission as it is to the police department of any large city.

And all of it seems to have been lost on Mr. Levitt.

Deep suspicion of the entire business community such as that expressed by Mr. Levitt should be expected to result in gross misapplication of SEC resources, eventually resulting in contempt for the agency. And it certainly seemed as though during his tenure the SEC constantly complained that its resources were inadequate, complaints that seemed to go far beyond those of his predecessors.

It has already been noted here that Mr. Levitt attempts to explain how Enron’s alleged long-term malfeasance slipped through undetected in all the years of his watch by arguing that he had to direct SEC resources onto the wave of initial public offerings that crested during his term, and away from policing “established companies” such as Enron. But Mr. Levitt’s comment condemning the business community as a whole savors of a paranoia that suggests that he was much more scattered and incompetent than his facile explanation allows. When the head of the SEC becomes so delusional as to believe that the entire business community cares only about “what they can get away with, not what is right,” the SEC is probably going to spend most of its resources on fool’s errands, trying to scare the demons out from under every bed. There won’t be many resources left over for finding the real crooks. All of which goes a long way towards explaining how irregularities at companies such as Global Crossing - a huge, volatile start-up with a flaky business plan which was and is run by Gary Winnick, a former close associate of Michael Milken and big-time Democrat contributor - might have escaped the notice of Mr. Levitt’s SEC.

Posted 6:34 PM by Robert

A Simple Mistake?

Newsweek is apparently reporting that a memo by Max Hendrick III, of Vinson & Elkins, Enron's outside law firm, describes how Enron's chief accounting officer, Richard Causey, characterized one of its controversial off-the-books partnerships. The Newsweek article reads in part as follows (quoting from the internal Vincent & Elkins memo):

"’Causey pointed out that an unfortunate error will require an adjustment to the third quarter [financial] statements’ during an August 31 interview, the memo says. ‘Causey characterizes this as a simple mistake that now requires correction.’ That ‘simple mistake’ forced a $1.2 billion reduction of Enron's net worth.”

It is interesting that in an apparently confidential interview with Enron’s lawyers, a setting in which one might think the incentive for Mr. Causey to dissemble was rather low, he characterized the Enron accounting for what appears to be a representative “bad” partnership transactions as a “simple mistake”. That characterization will not make things easier for a prosecutor or civil plaintiff.

Or, in the case of a civil plaintiff, will it? The future may hold some surprises in exactly what plaintiffs argue in the inevitable legal actions to come.

To the extent plaintiffs are expecting to benefit from insurance maintained by Enron, Arthur Andersen or anyone else, consider this: It is generally not possible to insure oneself from liability for one's own actual, intentional fraud.

So, are Mr. Lerach and other civil plaintiffs going to be arguing that Enron's financial statements were prepared with actual, intentional fraud? Will they be happy if the government prosecutors weigh in with such claims?

And just what was the agenda of whoever it was who leaked the apparently confidential internal Vinson & Elkins memo to Newsweek?

Posted 11:14 AM by Robert

Presidents Day

Today is Presidents Day, an official national quasi-holiday on which enough people do not work so that the rather large number of people who do work are wickedly inconvenienced.

But my real quibble with Presidents Day is that George Washington and Abraham Lincoln were not mostly just "Presidents" - they were transcendent universal political geniuses of an order scarcely comprehensible by ordinary people. If they are not political figures worth commemorating individually, then who is?

Presidents Day drives home the fact that one person who should not be individually commemorated is Martin Luther King, Jr. It is not that Martin Luther King, Jr., who did undeniably wonderful things, should not be commemorated. But many things, including Black History Month, remind us that there are a great many other African-Americans whose achievements are at least as significant as Dr. King's, even in his chosen sphere. Further, I cannot agree with singling out a particular ethnic group for implied commemoration, which is what Martin Luther King Day really is. The problem would be made worse by expanding the number of such implied ethnic days.

The appropriate solution is the abolition of Presidents Day and the restoration of Washington's Day and Lincoln's Day (the "birthday" aspect is a little loopy - maybe their inauguration days make more sense). Martin Luther King Day should be desanctified, and a new "Civil Rights Day” or "Bill of Rights Day" established - but not established as a replacement for Martin Luther King Day.

It's just stupid to pretend that Washington and Lincoln were mostly just "Presidents," while Martin Luther King, Jr. was something so special as to warrant a individually named day.

Posted 12:09 AM by Robert

Turning Point?

There are signs that cooler heads are beginning to understand - or at least beginning to admit - that the evidence of wrongdoing against Enron, Arthur Andersen and their operatives is a lot thinner than much of the media has suggested. In contrast to much incoherent media coverage, especially in the New York Times, Carrie Johnson at the Washington Post today reports on just how difficult it is likely going to be to demonstrate liability, at least on the criminal front, in her article Enron Case Shapes Up As Tough Legal Fight. Some pertinent excerpts from the Post article are copied below, but the whole article is worth reading:

“As the case unfolds, a consensus has emerged in much of the legal community, including academics, former prosecutors and criminal defense lawyers, that a Justice Department task force is likely, eventually, to seek criminal indictments against some former executives at Enron and perhaps its outside auditing firm, Arthur Andersen.”

“But legal experts suggest that it may be difficult to make the charges stick.”

"’I have lived through these hysterical cases before,’ said John Dowd, a Washington lawyer who defended Sen. John McCain (R-Ariz.) during the Keating Five influence-peddling scandal in the 1980s.”

"’Despite all the huffing and puffing, it's not always as easy as it appears,’ Dowd said. ‘There are going to be some problems for the government, I think. There are an awful lot of accounting and attorney defenses in this case.’

….

“Simply using partnerships to move debt off corporate balance sheets, as Enron did, is not necessarily illegal if there was no intent to defraud, said Peter Romatowski, a white-collar defense attorney at Jones, Day, Reavis & Pogue in Washington.”

“Some companies have been caught in violation of securities laws by booking revenue from one quarter into another to artificially inflate their earnings. Enron pursued a complex web of measures to shift its debt and inflate revenue, many of which were blessed by their auditors, Romatowski said.”

“’We're a long way from yet seeing described anything so simple and raw and clearly intentionally fraudulent’ as booking revenue in the wrong year, Romatowski said.”

The Washington Post previously published interviews pointing out that the Powers Report does not in fact attack the higher management of Enron in the way the company’s more hysterical critics have made out. For example, a February 4 report by Susan Schmidt. included this passage:

"Donald Langevoort, a securities law professor at Georgetown, said of the report: 'It certainly adds to the evidence we've already seen that there were deliberate falsifications that led to fraudulent accounting. The question becomes not so much were the financial reports accurate, but were they doctored -- and if so, by whom.'

“But Langevoort noted that the ‘language of the report is very measured with respect to its senior executives, in questioning what Lay and Skilling knew or should have known. There is a mile of difference between 'known' and 'should have known' that amounts to whether you can stick someone with securities fraud.’"

"’The report talks about a failure of management; it says Lay acted more like a director than a senior executive. That is not terribly unusual in a large corporation and certainly not the basis for liability,’ Langevoort said.”

“The report was prepared for the board of directors, and while it criticizes the board, those criticisms are mainly directed at its failure to live up to its responsibility to monitor management decisions and internal controls. The board could face negligence lawsuits, lawyers said, but on the basis of the report's findings, members would not likely be vulnerable to civil or criminal fraud charges.”

As stated here previously, the Man Without Qualities believes it is likely that the higher managment of Enron will be found to have at most negligently prepared the company's financial statements. As Mr. Langevoort and the Post point out, the Powers Report supports that position, and claims to the contrary are, in my opinion, attenuated and seriously misrepresent the Report. Further, it should be obvious that quoting fragments of this 200-plus page Report runs the serious risk of presenting the fragment out of its intended context.

I also note that the Wall Street Journal coverage has, in my opinion, been excellent.

In addition to what appears to be a growing understanding in the more reasonable media that the case against Enron is not easy or obvious, there are signs of desperation at The New York Times, which yesterday ran a front page article by Daniel Altman with the sinister title: “Enron Had More Than One Way to Disguise Rapid Rise in Debt.”

S-O-O-O-O SCARY! One has to read EIGHT paragraphs into this nasty article to find this sentence: “Enron's accounting treatment conformed to existing recommendations from the Financial Accounting Standards Board, the nation's accounting rule maker, said Timothy S. Lucas, director of research and technical activities at the board.” One would think that “hiding the ball” in the eighth paragraph of this article, might be worthy of the same accusations of disclosure irregularities the Times has leveled in such unmeasured terms against Enron itself. But the fact remains that the Times is now reduced to running front page articles accusing Enron of engaging in disclosure practices which DID COMPLY with the applicable FASB standards. I would ask if they had lost their common sense, if the answer hadn’t been so obvious for so long.

Posted 3:13 PM by Robert

All in the Family

The enviably clever Virginia Postrel, among others, does not share the conventional wisdom's "follow the money" approach to understanding influence acquisition and, at the extreme, corruption. I agree for some reasons perhaps worth considering as Congress lurches towards additional campaign finance restrictions. (Of course, Ms. Postrel may attach nuances to her disagreement with the conventional wisdom that varies considerably from what is presented here. She is more than capable of expressing her own take.)

The phrase "follow the money" is beloved by pseudo-tough journalists and their putative prey but figurative (sometimes, actual) drinking buddies. Journalists brandish the phrase to convince their audiences that they commune with a “hard headed,” “no-nonsense” type who knows “what really matters,” and who can be trusted to “get to the bottom” of the political concern of the moment. “Feisty,” “savvy,” and “down to earth” clutter the introductory remarks offered by their friends on public speaking occasions (and they DO like to speak). Such journalists are, for example, especially thick at the New York Times and the Washington Post - the rattle of pebbles on the shore under the receding wave of Watergate-era nostalgia.

Politicians (including government bureaucrats and other functionaries) love the phrase, the approach it connotes and the journalists who wield it, because politicians are acutely aware that they are NOT primarily motivated by the drive to acquire money personally. The politician rests comfy knowing such journalists assure the public that the politician is under constant and careful watch by the hard-headed, no-nonsense, feisty, savvy, down-to-earth journalist who has what it takes to follow the money, but also knowing that when the money trail is followed it generally leads to a cul-de-sac on which no politician has built even so much as a vacation home.

But politicians are also generally highly materialistic. They are obsessed with money – but it is generally other people’s money. The political system allows politicians to direct and regulate the way other people spend their "own" money. The system also allows politicians to direct the government’s spending of money it either acquires from taxpayers or simply creates.

In general, politicians personally traffic in forms of consideration entirely other than money: information, power, influence, prestige, sex and fame being some of the more common. Politicians within the Federal Beltway, for example, do not generally bribe each other with cash. No. They instead offer untraceable influence on agency and Congressional action. They dangle access to media time and approval (nothing beats a puff piece when you’re down). They dole out choice and valuable facts, sometimes but not always in the form of "leaks." While studies do not appear to be publicly available, Washington reputedly has the most developed delivery system for high quality, at-home sexual services in the nation – perhaps the world. Someone is using it.


By way of example, consider that the Supreme Court is staffed in part by politicians (in the generalized sense in which I am using the term) known as law clerks, who are assigned to the various Justices for one or two years. These clerks are normally fresh from law school and a one-year stint as a law clerk on a lower court. They write at least the first or early drafts of many Supreme Court opinions, and have a substantial ability to influence and introduce ideas and approaches of the Court (but, of course, they have no vote). Many of those ideas and approaches can come from the law professors who recommended the clerk to the Court, professors with whom the clerks often maintain an active relationship and deeply wish to please to advance a future academic career. A Supreme Court decision can determine ownership of many billions of dollars - even occupancy of the White House. The very real role of such law clerks and their professors in influencing (read, "lobbying") the Court towards a result desired by these unpaid "lobbyists" is not obviously more benign than the role of a paid lobbyist attempting to influence Congress or a regulatory agency on behalf of, say, a commercial interest group. Nor are they obviously more benign than most solicitations for campaign funds, even after giving effect to any implied purchase of influence. In helping to place a clerk on the Court, the professor also obtains influence. By cultivating influential professors, the Justices obtain flattering law review commentary, among other benefits. The clerks enjoy their brief, direct influence and hope for a good academic position when they leave the Court for their own professorships. The friendships, agendas and utilities imbedded in the relationships among the clerks, law professor and the Justices are mostly non-monetary - but that doesn't make them benign or democratic. All of these people have chosen to work for much less money than they might have otherwise have earned. Instead, they are receiving and prefer to receive non-monetary compensation? Prestige, power, friendship. Sometimes, maybe sex. What is left out of this system of course is the voters.

To the extent monetary relationships can be effectively limited in politics (if that could be done), the role of non-monetary relationships will likely be increased. The Court is not essential to the above example. Any regulatory agency or Congressional committee or caucus has its own analogous "micro political climate" which largely omits ordinary voters. Personal bribes, whether monetary or non-monetary, are equally destructive. Monetary bribes are properly prohibited. It is hard to see why it is a good thing for the political system to increase the influence of insiders positioned to engage in non-monetary relationships to advance often-concealed personal agendas. In fact, carried not so far, the whole model comes to resemble Versailles.

Of course, the election process is one place where money comes to the surface. Elected politicians want money to purchase advertising time and otherwise finance their campaigns. But the amounts involved in elections are tiny compared to the sums traded through the political system. Even for the President, a few hundred million dollars in money gets you elected – and the opportunity to affect the direction of trillions of dollars through non-monetary trades. No wonder there’s a fuss going on.

When I was just starting out many years ago, a wily friend advised me that in any transaction in which I became involved it was worthwhile from time to time to quietly retire to a private room and ask myself whether the deal made financial sense for all of the parties. If it didn’t, then I should ask myself “Where are the girls?” Of course, he was using “girls” in its most general sense, as including “boys,” “fame,” “media approval” and, of course, the delirious and irresponsible pleasure of spending other people’s money. Politics is mostly about such off-balance-sheet “girls” – and both the politicians and journalists know it.

The phrase “follow the money” is a joke on the outsiders, the fools – that is, the voters. A more accurate phrase would be something like “follow the utility.” But use of “utility” in this context would require educating a public apparently determined to see a politician’s craving for power as somehow different in kind from a businessman’s craving for money. Too, if through some accident of fate the public actually somehow WERE to become educated, a lot more than one inside joke would be in danger of blowing up.

It disturbs most people to tell them that economic laws and incentives existed and applied before there was money, exist and apply independently of money, and will continue to exist and apply if money ever ceases to exist. To cite only one example of many, for decades Daniel Patrick Moynihan was savagely criticized by those deeply disturbed by his observations that the economic incentives of the welfare system were dissolving the African-American family. Today, the major political parties vie for bragging rights to the success of the 1996 welfare reform laws which were based on exactly those observations (and, ironically, passed over Senator Moynihan’s objections).

To the extent it relies on non-monetized transactions, politics resembles the family – a rather demonic family, perhaps. Some of the better economists have for quite a while now turned their attentions to the application of economic laws to non-monetized transactions. Family structure has been explored brilliantly by Gary Becker, an effort largely justifying his Nobel Prize in economics. Other economists, such as George Stigler, have explored the capture of regulatory agencies by the very interests groups they regulate – an exploration involving recognition of non-monetized political transactions. But the non-monetary trafficking that goes on within the Beltway and other political nodes throughout the world deserves a lot more attention. Such attention is required at an intellectual level – but is even more essential and dangerous as education of the PUBLIC.

The First Amendment is a hardy weed with much capacity for growth. Who knows, maybe one day the political parties will vie to claim credit for a REAL political reform bill that accepts the interaction of the monetary and non-monetary aspects of the political system, just as the 1996 welfare reform bill finally capitulated to Senator Moynihan’s insights.

Such reform would, of course, bear no similarity to the unconstitutional political aneurysm now bulging from the Capitol’s major artery. We may just have to wait for the stroke and work with whatever is left.

Posted 10:30 AM by Robert

Ze Fraunch

An item by Jim Bennet posted in InstaPundit concerning whether the French are "surrender monkeys" has drawn a reply from a Frenchman living in the US, also posted on InstaPundit and reading in part:

"What makes you think I don't enjoy French bashing?”

That response called to mind an answer I received from another Franco-American expat to my observation that the many French people living in the United States were all but invisible. I had mused that it is, for example, impossible to imagine the French equivalent of the British scene in Santa Monica, where one may occupy an entire night "pub crawling" from one more-or-less authentic British-patroned establishment to another (I call upon Angeleno Mickey Kaus to vouch for this astonishing factoid, as Nancy Mehta once called upon Hecate for romantic guidance).

My French friend patiently explained to me: "Child of ignorance, it is often said that when three overseas English find themselves in a room, they form a club, but when three overseas French find themselves in a room, they have an argument."

He was right. He almost always was. I consider his characterization one of the many engaging traits of French expats.

Update

I am told that the actual number of hard-core British-patroned Santa Monica pubs may just be two. It seemed like more than that at the time, but maybe after enough libations at the first two the rest just seemed authentically English, and to some extent our group (a tad heavy with garrulous Australians) did form something of a movable feast which might have enhanced the atmosphere. One's memory of the later reaches of a good pub crawl is of necessity a bit on the hazy side. In any event, the experience was enough to prompt my later comments to my French friend.