|Man Without Qualities|
Saturday, August 02, 2003
Most informed people know that leaving keys in an unattended motor vehicle is a crime in many localities, including the entire State of Texas, just by way of example. Why? Because nearly 20% of all vehicles stolen have the keys in them - and the driver of a vehicle stolen with keys left in it quite obviously should bear some responsibility in the crime committed against the driver. But it doesn't take a criminal law to make this point. Failure to lock one's car is not, to my knowledge, a crime anywhere. But it is very important to lock your car because, among other things, approximately 50% of all vehicles stolen were left unlocked.
The law's affixing blame for a crime on a victim is common and proper, even with respect to the most heinous crimes imaginable. A parent who leaves a baby unattended on a New York sidewalk would quite properly spend considerable time in prison in the event of a murder of the baby by a passing psychopath, even though the parent (in addition to the baby) is also very much a victim of the criminal act. The fact that a voluntary, psychopathic action by a passer-by killed the baby instead of, say, accidental crushing by a passing bicycle messenger, is not particularly material - the parent obviously helped to cause the death of that baby and such a parent should be held criminally liable.
Some victims quite obviously should bear some responsibility in some crimes committed against the victim. The crimes for which a victim is held criminally liable for the criminal act are generally crimes which could have been avoided if that victim had taken some obvious precaution (although the victim is not deemed culpable in all such crimes).
But there are many other cases in which a victim is held civilly liable for the damages caused by a crime against the victim. For example, if two people each own a half-interest in a car which is stolen on account of one owner's negligence (such as leaving those keys in the car), the negligent driver would ordinarily be liable to the non-negligent co-owner for half the loss. That the loss was caused by a third party's crime wouldn't make any difference.
And there is an even larger class of crimes for which the victim is not potentially criminally or civilly liable to anyone else, but nevertheless obviously bear some responsibility in the crime. Again, by way of example only, someone who leaves his front door unlocked in a crime-ridden neighborhood obviously bears some responsibility for the burglary of the house. In some cases, the owner may be criminally liable - if the house contained a gun which was stolen in the burglary, for example. In some cases, the owner may be civilly liable - if the house contained a valuable, borrowed painting which was stolen in the burglary, for example. And the owner's insurer may hold the victim/owner accountable by refusing to pay. But, in most cases, the owner will simply be considered to be careless or an idiot by many people who will deem the owner to bear some responsibility - and who, thereafter, will take practical measures such as declining to lend valuable paintings to the owner.
Assigning responsibility for a crime is not a zero-sum game. A car thief, child murderer or burglar is not made any less responsible for the car theft, infanticide or break-in because a victim should bear some responsibility in the crime. It's not just obvious - in many cases it's the law.
Yet, despite the many case in which a victim is often considered to bear some responsibility in the crime committed against him or her, Robin Wallace writing for Fox News nevertheless leads off with this preposterous assertion:
Rape is different from other crimes. Though society as a whole has made tremendous progress in understanding the crime of rape, the pathology of rapists and the unique trauma of rape victims, many people still cling to ignorant notions about rape, and many victims are still forced to suffer enormous shame and blame. Rape is still the only crime where the victim is often considered to bear some responsibility in the crime committed against her.
The assertion is bizarre enough on its face, but what is even more peculiar is the litany of example Ms. Wallace produces to support her claim. They are copied in italics below, with my comments in bracketed text thereafter:
When a convenience store is the target of a stick-up, the robber doesn’t get a pass because the store is open in the middle of the night, located in a bad neighborhood, is known to have a certain amount of cash on hand, or is tempting thieves by having its goods displayed in the window. [True, but confused. Whether the store is considered to bear some responsibility in the crime committed against it is not the same thing as saying that the robber "gets a pass." A convenience store which is the target of a stick-up will often be held civilly liable to its injured employees (or their survivors) if the store did not structure its security measures to take into account that the store is open in the middle of the night, located in a bad neighborhood, is known to have a certain amount of cash on hand, or is tempting thieves by having its goods displayed in the window. If the risk to the employees is bad enough, the store may even be criminally liable for exposing them to the danger.]
When a home is burglarized, the owner’s history of leaving his doors unlocked, or failure to have an alarm, or choice to live in an expensive neighborhood that flaunts the wealth inside, does not figure into the defense. [It's the same confusion on Ms. Wallace's part. Those aspects do not figure into the defense - but the owner may nevertheless be considered to bear some responsibility in the crime in many ways, as noted above.]
When a tourist is mugged, the defense doesn’t usually argue that the victim asked for it by visiting a city he was unfamiliar with, or carrying her pocketbook in plain sight, or getting off the subway at the wrong stop. [More of the same. If the tourist was carrying a borrowed or partially-owned diamond (a common occurrence in the diamond business) which the robber takes, that tourist better be prepared to write some big checks, not to be reimbursed by insurance and to be turned down the next time he asks to borrow a diamond.]
Ms. Wallace's approach - which is a common one - not only confuses the issue of possible partial responsibility of a victim with the exoneration of the criminal, but completely ignores the main way in which rape is different from many other crimes: all sexual contact is rape unless there is consent.
That means that every, single rape case in which sexual contact is admitted comes down to exactly one issue: was there consent?
It's not rocket science. Rape is a crime, so if the defense can raise a reasonable doubt that consent was given, the crime is not sufficiently "proved." How does one show consent - or raise a question that it was given?
Since the issue is whether rape victims are being treated "differently" let's first consider the issue of "consent" in other criminal contexts. For example, physically knocking someone to the ground and piling on is a crime - unless there was consent. How would someone charged with assault and battery for tackling someone else in a pick-up tackle football game in a park prove that the injured party has "consented" to be injured? There is not likely to be a written consent. One would probably first look to the venue: the injured party went to the park, where it is common knowledge that tackle football takes place. What if the injured party says he thought the game was actually "tag" football and told the defendant that was his belief, which the defendant denies? Well, showing that the injured party had often or sometimes participated in tackle football games in similar circumstances would be one natural way to go about it - in other words, the matter would likely center around evidence of the injured party's personal history. The defendant's past personaly history would also be relevant. And the focus on such evidence wouldn't change a bit just because it is perfectly possible that the injured party may have consented to be tackled any number of other times by any number of other people and still not consented to be tackled this time.
Obviously it is much more painful to have one's past sexual history explored than to have explored one's history of past participation in pick-up football. In that sense rape is different.
But proving or disproving "consent" often involves exploration of the parties' prior course of dealing, with each other or with other people in similar situations. That's never going to end - and it shouldn't.
And, quite independently of the possible criminal liability of Mr. Bryant, the public has an interest in whether his accuser/victim should be considered to bear some responsibility in the crime committed against her in the way the public have an interest in whether a home owner who is the victim of a burglary should be considered to bear some responsibility in the crime committed because of the owner’s history of leaving his doors unlocked, or failure to have an alarm, or choice to live in an expensive neighborhood that flaunts the wealth inside - and not taking appropriate measures to address those risks. But just as homeowners who leave their doors open in crime-free neighborhoods are not generally negligent, the public is interested in questions such as: should the victim/accuser have known and acted as if there were a rape risk in going to Mr. Bryant's room? That must be very painful for the victim/accuser.
Friday, August 01, 2003
Davis Descending XIV: Fraying The Obvious(0) comments
California Congresswoman Loretta Sanchez, one of the nations greatest repositories of bad judgment - who last figured prominently in her efforts to hold a party for attendees of the 2000 Democratic National Convention at the Playboy Mansion - now opines that Dianne Feinstein should step in as a Democratic "backup" candidate for Gray Davis in the upcoming recall election. Reps. Calvin Dooley, D-Fresno, and Brad Sherman, D-Sherman Oaks, joined her. O, and Senator Barbara Boxer also says that the party may need a "backup" on the ballot if Davis declines too much in the polls.
To some in the media this represents a "fraying" of Democratic support for Governor Davis.
Of course, the entry of a Democrat of any stature as such a "backup" candidate would be a disaster for the Governor - and for the Democrats, if it's not Senator Feinstein. But what's even more peculiar is that these suggestions of "fraying" are being made against the background of such developments as:
1. Art Torres, chairman of the California Democratic Party, said: "At end of the day, there will be no Democrat on the ballot, other than Governor Davis."
2. House Minority Leader Nancy Pelosi, D-San Francisco, has joined state and national party leaders in arguing that the best way to defeat the recall is to have no other significant Democrat running.
3. Dianne Feinstein has said she will not run - and she won't because she is not stupid and it's a stupid idea for her.
None of the above constitutes meaningful "fraying." If Mr. Davis plunges in the polls after bringing in the budget (an unlikely decline), he's in big trouble. If Senator Feinstein enters her name, that's a disaster (see above). None of that is new - and it's not "fraying" of Democratic support for a few Democratic office holders to say the obvious and a few loose nuts like Loretta Sanchez to suggest more. Nor is it "fraying" for Bill Lockyer to say that if the Governor runs a "puke" campaign again that some Democrats would "jump ship" - he's just not saying that he or they will enter any Democratic name as an alternate, he saying he doesn't want Davis to savage his and Eli Broad's friend Richard Riordan.
[By the way, we all know how serious Mr. Lockyer is about "puke" and "trash" stunts. Mr. Lockyer is the man who suggested that he wanted to "personally escort" Enron executive Kenneth Lay to a California prison cell so that Mr. Lay could become the victim of homosexual rape. Very delicate sensibilities in that man Lockyer, who, as a state senator, sponsored California's 1984 hate-crimes law.]
The New York Times reports:
The government said today that the nation's unemployment rate fell in July. But the employment report offered scant evidence that conditions in the labor market are improving. .... While the drop in the jobless rate is encouraging, the reason it moved lower is not. According to the Labor Department, the labor force shrank by 556,000 in July, to 146 million. Of that number, nearly half a million, or 470,000, were discouraged Americans who just stopped looking for jobs because they did not think work would be available.
Here's something for Herr Doktorprofessor Krugman to write about! Not the fall in unemployment - but the fact that it is "meaningless" because the labor force shrank as discouraged Americans just stopped looking for jobs because they did not think work would be available. Of course, Labor Secretary Elaine Chao ascribed some of the report's negative implications to seasonal factors, preferring to focus on weekly data on claims for unemployment benefits, which have been on the decline. "July is a funny month because there are lots of factors at work," she said in an interview on CNBC. "School is out, a lot of secondary workers … exit the work force."
That 2.4% growth rate and the fact that employment is a trailing indicator can become little asides, at most! Other factors that can be dismissed as part of the very little evidence in the data for a strong recovery ready to break out:
1. Recent declines in weekly initial claims for unemployment benefits took place after the Labor Department conducted its monthly survey.
2. Employers added 42,000 temporary workers to their payrolls in July. This is the third consecutive increase in temporary employment. "As is often the case, you start to see an improvement in temporary workers before you see payroll hiring pick up," said David Resler, chief economist at Nomura Securities International.
3. The Institute of Supply Management said its manufacturing index rose to 51.8 in July from 49.8 in June. A reading above 50 percent means the economy is expanding.
4. Rising mortgage rates may have started to brake what many informed people view as a possible housing bubble - but this can be dismissed by focusing only on the corresponding slow down in the construction.
5. Inflation remained tame.
6. Average hourly earnings rose five cents.
7. The University of Michigan reported that its consumer-sentiment index climbed to 90.9 in July from a mid-month reading of 90.3, and June's 89.7. The latest figure beat economists' forecast of 90.4 and was more upbeat than a report earlier this week from the Conference Board that showed a sharp drop in consumer confidence due to the sour job market. Consumers' take on current conditions improved during the month but expectations for the future were less optimistic.
There is also negative information - and I don't mean to deny its significance. But, to Herr Doktoprofessor the economy is not emitting mixed signals and could go either way. No. For him, it's simply that very little evidence in the data for a strong recovery ready to break out.
And Herr Doktorprofessor could surely find some way to work in his "banana republic" macro, which he once restricted to columns dedicated to attacks on the President and Congressional Republicans - but now seems to have become more of an all-purpose column extrusion device for him.
MORE for Herr Doktorprofessor to ignore:
America's manufacturers saw demand for their products rise in June by the largest amount in three months, another encouraging sign that the fragile factory sector is on the mend along with the rest of the economy. The Commerce Department reported Monday that orders to U.S. factories rose 1.7 percent from May, the second month in a row that orders went up. Gains were fairly broad-based, with orders rising for machinery, household appliances and automobiles as well as ``nondurable'' goods, such as food products and chemicals. June's performance, which followed a 0.3 percent rise in May, was stronger than economists were expecting; they were forecasting a 1.5 percent increase in factory orders. Monday's report, along with other recent data on factory activity, suggest the industry is turning a corner.
The Man Without Qualities (here and here) has pointed out that the inter-racial aspect of the Kobe Bryant rape case is being willfully avoided by the media - especially the mainstream media - which are mostly entirely avoiding all mention of the issues raised by this troubling aspect of the case or relegating such issues to brief, oblique references tucked at the back of long articles.
But the racial aspects of the Kobe Bryant case will probably not be brief, oblique or possible to relegate to the back of any media bus. And that's starting to become apparent:
ABC News has learned that an Eagle County sheriff's deputy involved in the investigation was named in a previous racial profiling settlement. In 1995, the Eagle County Sheriff's Office agreed to pay $800,000 after being sued for racial profiling. More than 400 ethnic minorities said they were wrongfully pulled over when driving on the nearby interstate. One officer named in the lawsuit is a now a key investigator in the case against the NBA superstar.
An ABC News legal expert and former prosecutor said this new information could be damaging to the prosecution's case.
"I think this is explosive evidence, and I am shocked that in fact the authorities in Eagle County had this individual, these people, involved in this case because again, this (shows) shades of Mark Fuhrman and the OJ Simpson case," legal expert Kimberly Guilfoyle Newsom told ABC's "Good Morning America."
"Be sure that the defense is going to bring this up and if that investigator or the people involved in the profiling case take the stand, they will be cross-examined about it. (The defense) will definitely try to bring it out in front of the jury. We saw that in the beginning of the case, them trying to assert, essentially, that this was a racially biased or motivated case."
Sources familiar with the prosecution also confirmed to ABC News that the district attorney is aware that there were no witnesses of any kind to the alleged sexual assault on June 30 at the Lodge and Spa at Cordillera. There were previous reports in the media that some hotel guests may have heard a struggle.
What is particularly amazing in this article is the admission by the ABC "expert" that We saw that in the beginning of the case, them trying to assert, essentially, that this was a racially biased or motivated case. Well, maybe "we" saw it, but "we" did not report it very much or very clearly - that is, if "we" refers to representatives of the media. So, for the bulk of the public, this report is left to arrive with the effect of a watermelon crashing on a city sidewalk. Nice work, media professionals!
One device being widely and disingenuously employed to allow the mainstream media to not discuss the racial issues in this case (or issues that will lead inevitably to racial issues) is a phony "concern" for the privacy of the victim/accuser. (Example: The Los Angeles Times has a policy not to identify alleged victims of sexual assault in most cases. The Times also has not published details of the accuser's background to protect her privacy.) But her race and all of the racial issues raised by this case could be disclosed and discussed as frankly, easily and extensively as her sex and the gender issues raised by this case without invading her privacy. Further, that evasive device is leading the mainstream media into some unintentionally hilarious double-speak, as with this pearl from the Denver Channel: The identity of the 19-year-old Colorado woman who accused Kobe Bryant of rape has not been disclosed publicly but her name, address and phone number have been posted on numerous Web sites.
In most contexts, information that has been posted on numerous Web sites is considered the most public information of all. Just by way of example, campaign finance reform advocates often urge that the names of contributors or other people active in the political process be really, effectively made available to the public by putting it all on the internet. Not in the Kobe Bryant case. In the Kobe Bryant case information posted on numerous Web sites has still not been disclosed publicly. The inter-racial aspects here seem to propel the mainstream media through some particularly bizarre and silly looking glass (along with the judge hearing the case, with his weird gag orders purporting to punish media publishing information already posted on numerous Web sites).
There is more to come. Amazingly, even the articles today reporting the "explosive evidence" of "racial profiling" do not mention that the accuser/victim is white. Are we supposed to believe that the Eagle County Sheriff's Office might harass racial minorities, but of course would never be involved in bringing a rape case against an African-American just because his alleged victim/accuser is white? Even where there were no witnesses other than the victim/accuser?
By the way, some people are saying that Mr. Bryant lied to investigators. If he did lie, he was just lying about sex - which every William Jefferson Clinton supporter "knows" is no big deal. Mr. Clinton was of course found by a federal judge to have lied in a sex abuse lawsuit arising from his efforts to intimidate sex from an Arkansas state employee - Paula Jones - abusing his status as governor.
As an aside: Mr. Clinton avoided most of the possible claims Ms. Jones might have brought against him simply through the expiration of applicable statutes of limitations (she waited too long to sue). Many allegedly abusive Catholic priests have also been spared sexual abuse lawsuits and indictments by the running of such limitations periods - an occurrence deemed so intollerable by the California legislature that it enacted an unconstitutional ex post facto law retroactively extending the limitations period for such sex crimes. The Supreme Court recently overturned that California ex post facto law with respect to criminal charges, but the Court's decision does not reach the right of a state (such as Arkansas) to pass such a law reviving civil actions.
Link thanks to Eric McErlain
Thursday, July 31, 2003
Man Without Qualities [July 25, 2003]:
Herr Doktorprofessor [Paul Krugman, July 25, 2003] also thinks: There is very little evidence in the data for a strong recovery ready to break out. As far as I can make out, Mr. Greenspan's optimism is entirely based on models predicting that tax cuts and low interest rates will get the economy moving. But where [Krugman] has often cited recent employment statistics as evidence of economic health, here there is no mention that the number of people lodging new jobless claims plunged unexpectedly last week to the lowest level since February, which some economists think means a lot. Nor does [Krugman] explain why those economists are wrong.
The fact is that there is plenty of evidence in the data for a strong recovery ready to break out. But there is also plenty of evidence in the data for concern.
New York Times [July 31, 2003]:
In its first estimate of how the economy performed during the second quarter, the Commerce Department said that gross domestic product, which measures the total value of goods and services produced in the United States, rose at a 2.4 percent annual rate in the April-June period. That rise was well above the 1.5 percent rate of increase that most Wall Street economists had been forecasting.
While the output numbers came as a pleasant surprise, analysts were equally encouraged by a report from the Labor Department, which showed that initial claims for unemployment benefits fell for a second straight week in the period ended July 26.
Jobless claims dropped to 388,000 for the week, down from 391,000 the previous week. More significant, analysts said, is the longer-term trend: initial claims have been trending steadily lower for the last seven weeks.
Man Without Qualities [July 16, 2003]:
My difficulties with Herr Doktorprofessor stem largely from his reliance on (1) a constant stream of bad economics, including incomplete economics, (2) false, misleading and materially incomplete statements of fact and economic theory, (3) evasive language often intended to allow him to claim credit for predictions where none were made, and (4) a boring parroting of the then-current liberal Democratic line that he attempts to tart up as original commentary.
Wednesday, July 30, 2003
The most recent Harris Poll reports (through the Wall Street Journal) that 76% [of adults] disagreed with the Supreme Court's ruling that a university can use race as one of several factors when deciding whom to admit. That ruling stemmed from a challenge to the admissions policies at the law school of the University of Michigan. The high court struck down an undergraduate-admissions process at the school that weighted race more heavily.
With a 76% majority, it should be possible for anti-affirmative action forces to dismantle such programs through the elected branches of government, or through referendum. So, regardless of whether the Supreme Court's decision permitting limited affirmative action was right or wrong, the overall impact of the decision may be to terminate most affirmative action anyway.
Here's yet another article, this one in Slate, going on for many inches exploring the possible stereotypes and biases that may be coming into play with respect to the Kobe Bryant rape case. But the biases and stereotypes discussed are all gender-based biases and stereotypes:
Long before the first juror is selected, the nation is making up its mind about Kobe Bryant. Web sites condemning his accuser as a whore are proliferating. ... Without a filament of evidence, journalists have split: Some call the young woman his "accuser"; others say "victim." Some complain that he's already been tried and convicted in the media; others complain that she has been raped again in the media. ... The legal rules for rape have been "reformed" to the point that defendants have few of the usual presumptions of innocence while victims are still humiliated and exposed at trial.
How did this happen?
An interesting question. Historical gender biases, such as those that would characterize as a "whore" a woman who visits a man in his hotel room, matter. But, obviously, inter-racial rape has a whole additional set of historical biases and horrors to worry about.
Inter-racial rape may have been the only common historical example of the application of that rallying cry of some modern feminists: "If she said so, it's true." As To Kill a Mockingbird shows, the historical application of that rallying cry in that context was not exactly a benefit to society. One might rephrase it in that context as: "If she says so, he dies - in a tree."
But the Slate article again doesn't even mention the inter-racial nature of the case at all, and therefore doesn't explore any of the special, and especially destructive, stereotypes and biases that may be coming into play here. The word "race" does not even occur in this article. Nor do the words "white" or "black." But they do matter. Some racial stereotypes and biases may hurt Mr. Bryant, and some may help him.
But they all undermine justice, although one couldn't know any of that from this article.
POSTSCRIPT:Many things are not what they seem, including the Rorschach link in the title of this post.
Mania, Panic, Crash II(0) comments
The Man Without Qualities has received an e-mail from a very astute reader essentially saying that my prior post on the dotcom "bubble" is a bunch of malarky, although my learned reader uses better form and language than that. Specifically, the e-mail notes:
Granting that the internet had (indeed, still has) the possibility of dramatically improving productivity through disintermediation, why do you think that the companies which are the disintermediators would earn more than a trivial share of the productivity gains? After all, very little of the gains of electrification went to electric companies (and wouldn't have, even if they were unregulated). None of the gains of facsimile transmissions went to the fax manufacturers (other than normal economic profits). Without barriers to entry either from superior skill or patents, why should the internet be anything different?
That said, I agree that someone needs to do the actual research on bubbles, not just blather on about theoretical models, but this time was one of the rare times you leave me unimpressed with the elegance of your insights.
I completely agree with my reader, as far as this analysis goes. In fact, where the internet has been effective to date, it generally provides generalized productivity increases which have been very hard for any one player to capture, just as suggest by this reader. But, as a preliminary matter, it is worth recalling that some dotcom investors had all those "stickiness" and "first off the boat" theories. I, personally never bought into those theories, which may be one reason why I, personally, never bought dotcom stocks at all. But I don't think it was clear that those theories were groundless or constituted "economic irrationality" at the time.
But there is a bigger gap in these observations. One dream of the boom-era dotcom investor was to purchase a portfolio of "new economy" stocks that represented a sector (that is, the dotcom sector or "new economy") that would grow without "old economy" restrictions like entrenched intermediaries, regulator and tax drag, etc. If that "new economy" grew at, say, 7% or 9%, the bet would have paid off.
Hence the possible significance of the Microsoft anti-trust suit developments, which helped to kill the optimism of the internet sector investors (as opposed to the "big kill" investors, who thought some company like Amazon would win big on "stickiness" theories and the like).
In any event, it is not easy to conclude that the thinking of the sector investors was "economically irrational." They certainly had a timing problem.
My reader's e-mail points that my prior post can be read as suggesting that the only way diversified-up-to-sector investors were expecting their returns was by hitting a few jackpots. That is not correct,and the post's suggestion was inadvertant . Generalized growth in the new economy at something like 7% to 9% would have been enough for that kind of play if the portfolio were a basket sufficient to capture the growth in a representative fashion. In this sense, diversified new economy sector investors essentially assumed that the new economy as a whole manifested "superior skill" or "claimed a niche" that would keep much of the new economy profits within the new economy. They may have been wrong, but they were expecting to get paid - a lot.
Enron Game Called On Account of Reality IV: Learning To Take Life Easy(0) comments
An interesting e-mail draws my attention to a blog posting by Charles Dodgson that includes this comment on my prior posts on the recent settlements between J. P. Morgan Chase and Citigroup and government regulators:
To most people, the $300 million payment would be a sign that the banks knew they were in hot water, and the lack of a formal guilty plea would be a technicality. To this guy, it's the reverse; the banks have, for some strange reason, agreed to pay $300 million to regulators who "have nothing, nothing at all, and know it" (his boldface), and their failure to extract a guilty plea is positive proof. Note particularly the rhetorical pirouette in which "the banks neither admitted nor denied any wrongdoing" somehow becomes a protest of innocence.
The e-mail I received also includes a copy of a message sent by the e-mailing reader to Charles regarding the above excerpt:
I'm not sure I understand. I haven't been following this matter nearly as much as you obviously have been, but aren't defendants presumed to be innocent unless they are convicted (or, I guess, found civilly liable) or admit they did wrong?
Maybe I'm letting my personal experiences get in the way of my understanding. I was once threatened with suit by the SEC without merit, and I know from that personal experience that defendants often pay to make a case go away even when they didn't do anything wrong - especially where the plaintiff is some powerful government regulator and they want to cut off bad publicity. Does this settlement look like one of those? What do you make of Columbia Professor Chaffee's quotes in the Times regarding the $300 million?
In my case, the SEC said I had traded on "inside information." I can assure you there was no inside information, but I had to settle (and pay!) without admitting or denying any wrong, because the SEC action would have been a disaster for my business. I had to "disgorge" my profits. Didn't Citibank make more than $100 Million off Enron? My lawyer - who works at a very good NY law firm - assured me that people do what I did all the time in these settlements and there is no "taint" because everyone knows that people have to settle with the SEC rather than spend their lives in humiliating and expensive litigation. Was he wrong? Should I sue my lawyer?
Well, gentle reader! Relax!
Presumption of innocence? Pshaw! Picky, picky, picky! Charles tells us that a "formal" guilty plea is a mere technicality!
Government lawyers admit that they couldn't find a mere preponderance of the evidence showing "intent to defraud?" Heck, what's that deficiency compared to having a settlement agreement with no admission of wrongdoing in it as a sign that the banks knew they were in hot water?
And if a prosecutor says something bad about you? Well, the prosecutor is a very busy man - he wouldn't say those things if they weren't true!
Anyway, who takes seriously that standard settlement agreement language "this agreement shall not be construed as an admission of any wrong or violation?" That language is a lawyer's in-joke! A settlement agreement is an admission of wrongdoing if you pay - just ask Charles.
A company wanting to terminate bad publicity and enforcement actions - regardless of their merit? Puleeze! Charles tells us that the banks entered into these settlements for some strange reason which most companies couldn't possibly understand. And that should be enough of an explanation for the likes of you! Why every defendant knows that to pay to make a meritless case go away (including every technology company in Silicon Valley that ever paid Mr. Lerach a settlement to get rid of a meritless class action of the type Congress had to eventually amend the securities laws to bar) is actually an admission of the charges.
Some Columbia securities law professor pointing out that new securities legislation makes the settlement a "no brainer" for the banks on economics grounds alone? Don't get so excited!
Fines imposed are much less than apparent profits from the alleged violations? Manana!
See, learn to take life easy. Sue that top New York lawyer of yours. Get another one to file the papers tomorrow. Don't you know? Litigating is fun! People who pay to make it stop are just big, uptight sillies who are admitting the charges against them, anyway!
Just ask Charles!
If you can find his rabbit hole.
Davis Descending XIII: Mr. Taranto Dissents(0) comments
Best of the Web thinks Gray Davis is toast even after bringing in the California budget:
The filing deadline for the replacement ballot is a week from Saturday, and it's possible that the Democrats will remain unified behind Davis, so that only Republicans and minor-party candidates will appear on the replacement ballot. This is probably Davis's best shot at holding onto his office; since Democrats hold a decided edge in California, the lack of options, combined with get-out-the-vote efforts aimed at interest groups loyal to the Dems, could push Davis over 50%.
We wouldn't bet the farm on it, though. Back in March, we noted that a poll had found "an unnamed Democrat would edge out President Bush." The problem, of course, is that in "an unnamed Democrat" can't actually run in a presidential race. Instead of their ideal or preferred choices, voters next November will have to choose between the incumbent and one of the actual guys now running--all of whom were losing to Bush in that same poll.
But the California recall actually does pit Davis against an unnamed candidate. And Davis is a lot more unpopular than Bush. Party loyalty may be enough to persuade most registered Democrats to vote for the governor--but that'll still leave him well below the 50% threshold. For this reason, we'd be very surprised to see Davis survive.
I wish it were true that Sweet Baby James were right - and I'm wrong - on this one. But, as I noted in the prior post on this topic, the worst the Governor has been doing in any poll that I know of is in that new internal poll by the California teachers union that reportedly shows him with a recall winning by a 57-43 margin. His ratings should be on the rise after the budget deal - and he doesn't have to go all that far to beat the 50% mark.
Worse, if there is only one major opposition candidate and its not a Democrat, then Mr. Davis is back on his home turf of demonizing his opponent. Best of the Web is right, in my opinion, that the California recall actually does pit Davis against an unnamed candidate - and that works against this incumbent. But if there is only one major opposition candidate, the Governor can probably recast the vote as de facto Davis against that candidate.
Unleash the demons of August and September!
... and gets a perfect "10" for both style and substance.
But, no fair! Herr Doktorprofessor was probably all emotionally and intellectually discombobulated over hearing that The Federal Reserve sees signs the U.S. economy is improving, especially in the long-suffering manufacturing sector, a development which he has declared - and keeps declaring - to be all but impossible.
It was just a bad Herr day.
Enron Game Called On Account of Reality III: Remembering Ms. Stewart(0) comments
Remember Ms. Stewart? The alleged perpetrator of an "inside trade" of 4,000 shares of ImClone stock has been indicted for "obstruction of justice" by the Justice Department in an indictment that says all kinds of nasty things about her, but doesn't actually charge her with "insider trading." The SEC has also filed a civil complaint against her.
Martha Stewart gave an order to sell all of her ImClone stock, all 3,928 shares of it, and received an average price of $58.43. According to the SEC Complaint, in doing so, she avoided losses of $45,673.
Think about that: she avoided losses of $45,673. Wow. This is a case that the Justice Department and Securities and Exchange Commission really care about. I haven't seen the budget, but those two federal agencies must have spent many times that $45,673 already in taxpayer money coming after Ms. Stewart.
And they must have really stuck it to her in the settlement negotiations. Just imagine what would happen in the O-so-tastefully decorated Stewart household if the Justice Department and Securities and Exchange Commission were to offer her a settlement agreement along the lines of what they just signed up with J. P. Morgan Chase and Citigroup. That settlement offer would require that :
1. Ms. Stewart pay a fine in an amount much less than the $45,673 she saved from the suspect transaction (she could do this at the settlement signing from the change she keeps in her penny loafers).
2. Ms. Stewart neither admits nor denies the charges - but can put out a press release pointing out that she does not admit the charges.
3. Ms. Stewart agrees to put in tighter risk management controls for her future investing - and promises to submit to the agencies a revised set of standards within 60 days.
4. All potential civil and criminal charges that could be brought against Ms. Stewart are dropped and settled.
5. The regulators get to say things like: "This cases serves as yet another reminder that you can't turn a blind eye to the consequences of your actions," and "These settlements send the clear message that wealthy individual equities investors have an obligation to analyze and understand the consequences of their actions, and they will be held accountable for actions that obstruct justice."
Did I say just imagine what would happen in the O-so-tastefully decorated Stewart household? You don't have to, I'll tell you what would happen:
MARTHA STEWART WOULD BE DRUNK ON THE BEST FRENCH CHAMPAGNE FOR A WEEK, THAT'S WHAT WOULD HAPPEN!
But, see, the regulators are really serious about the Martha Stewart case. They're not going to let her off with the kind of settlement agreement that banks that "know" they facilitated an alleged fraud worth, say, Seventy Billion Dollars to public investors get. No. The regulators want a settlement agreement from Ms. Stewart with bite. They want - they must have demanded - a settlement that makes Ms. Stewart admit she committed a crime! And the mere facts that (1) many people think that the regulators have probably got a pretty weak case against Ms. Stewart to take to the jury, and (2) Ms. Stewart has already lost her seat on the NYSE, her position as head of her own company, hundreds of millions of dollars in stock value, and much of her valuable reputation and public image, are not going to impede the stride of justice - this is a matter of principle, damn it!
It's not that there's a difference in regulatory standard here as between Ms. Stewart and the banks. We already know, because Larry Thompson, the deputy attorney general who chairs the Corporate Fraud Task Force, has told us: Corporations should not be treated leniently because of their artificial nature, nor should they be subject to harsher treatment.
It all makes sense. You understand, don't you: she avoided losses of $45,673.
You have to draw the line somewhere!
Davis Descending XXII: No Di Fi Today
Reports (Kausfiles and Daniel Weintraub and the Los Angeles Times - but the Times only reports that Senator Feinstein is being "urged" to run by others) that Dianne Feinstein may place her name on the ballot as an alternative/replacement to Governor Davis are far fetched.
For one thing, if that happened, Senator Feinstein would get the brunt of the Governor's coming multi-million dollar demonization campaign. She's not going to want to stand for that - why should she?
The entire Davis wing of her own party - and that wing does exist - would hate her.
Such a move would be all but fully contrary to her prior statements of solidarity with Davis - and would also be contrary to Terry McAuliffe's assurances.
And where is the drop in the Governor's polls that would justify such a step? Yes, a new internal poll by the California teachers union reportedly shows him with a recall winning by a 57-43 margin. But, if anything, his ratings should be on the rise after the budget deal.
Moreover, if she jumps in, she may open the way for more Democrats to do it - thereby splitting the vote. She could come out looking ridiculous and disloyal.
That's not the Di Fi we know.
UPDATE: Hardly were the electrons of the preceding post through the semiconductor switches when Kausfiles reported:
Buried lede: But kf's omnipresent spies say Arianna's been telling her co-conferees at Walter Isaacson's Davosesque Aspen "Brainstorm" conference that she's learned Feinstein's not running--and that she, Arianna, is. ...
Imagine that. Whowuddathunkit? California politics are just so wild, crazy and unpredictable!
Tuesday, July 29, 2003
The Bostonian Captivity Of The Church(0) comments
In a prior post, the Man Without Qualities strongly disapproved of the holdings of Massachusetts state judge Sweeney, who sought to impose a clearly unconstitutional "reasonableness" standard on the operation of the Catholic Church there:
"Reasonableness" standards are objective standards determined by weighing costs against benefits. Judge Sweeney seems to think that such a balancing can be effected on secular factors alone. That is grossly wrong. A religious administrator must weigh both the religious and secular costs and benefits of any decision. Secular risks must sometimes be taken to save souls, which (within the precepts of the religion) are invaluable, and secure other benefits seen (by the religion) as not of this earth. But a civil court cannot take spiritual benefits into account. Judge Sweeney's approach therefore requires a civil court to second guess the administrator or religious organization by conducting the court's own cost/benefit analysis while assigning a zero value to any religious benefit the decision may have. In other words, under Judge Sweeney's approach religion and spiritual benefits are officially and expressly determined to be worthless as a matter of policy by civil authorities. It is hard to imagine a ruling more inconsistent with the First Amendment.
Whatever "reasonableness" means in this case, there are certainly people who are incapable of reliably providing "reasonable" supervision. Judge Sweeney makes religious groups run by mystics who spend all their time in religious contemplation - to the exclusion of reasonable matters - now mere fodder for the tort bar. ... No more wise old rabbis or parsons or eccentric dottering Anglican ministers, nearly blind and plagued by creeping senility but nonetheless holding on and dispensing periodic jewells of wisdom and experience. Judge Sweeney says they don't have what it takes to fend off the tort lawyers. .... The church is not a corporation. A church is not created by the state and need not take the form of a corporation, a limited liability company, a partnership, nor any other government-recognized entity - and the state is not entitled to impose what it believes to be good policies of corporate governance on a church. .... The religion clauses of the First Amendment take all American governments out of the business of regulating or structuring the religious or secular government of religious bodies. It is often said that the First Amendment imposes a "wall of separation" between church and state.
There must be something in the Bay State water that makes state officials think they are Pope, because not only does Judge Sweeney want to run and restructure the Catholic Church there, but so does the State Attorney General, as a Wall Street Journal item notes:
Massachusetts Attorney General Thomas Reilly ... has been widely seen as exercising admirable restraint in sparing the archdiocese from indictment, in fact the report discloses a disturbing pattern of probably unconstitutional intrusions into the religious liberties of the Catholic Church. ... Consider his assumption that the state "must" play a central role in dictating internal governance reforms that the church "must" adopt. ...
Mr. Reilly's overreaching becomes obvious when he recounts the role played by his office during the burgeoning scandal and criminal investigation. The report insists that the bodies adopted by the church to monitor, prevent and remedy clergy sexual abuse be "independent" rather than give the archbishop the "complete control over the selection of Review Board members who must be 'in full communion' with the church." Such a board, complains Mr. Reilly, is not sufficiently independent to "make decisions, judgments or recommendations adverse to the Archdiocese as an institution, but still in the public interest."
Of course, if internal church governance fails to stem abuse, prosecutors have the power to pursue abusive clerics. There is little danger in the current climate that victims will fail to report abuse to officials; indeed, if there is any danger, it would be of false reports resulting from the public sexual panic generated by the highly publicized scandal, with some victims seeking financial compensation for minor indiscretions or for acts that never even occurred. ....
Mr. Reilly notes that one clerical administrator, who took abuse seriously and attempted to deal with abusive priests "firmly," nonetheless did so "within a culture and system that treated these people as colleagues rather than criminals." Mr. Reilly, although himself a Catholic, appears to have no understanding of the implications of a church that believes in the redemption of sinners, where pastors see themselves as shepherds rather than adjuncts to prosecutors. A bishop comes in for criticism "because he viewed his role primarily as pastoral." The archdiocese is criticized because officials "believed that Canon Law--the church's internal policies and procedures--prohibited it from reporting abuse to civil authorities in most instances."
This is not to say that prosecutors should feel the slightest need to cut any slack for a priest charged, on the basis of credible evidence, of sexual abuse. Yet if the First Amendment, which assures "the free exercise of religion," means anything, surely it allows a high clerical official to insist on taking a religious rather than a prosecutorial approach to internal governance. Mr. Reilly's attempted micromanagement extends even to when priests may wear clerical garb: The archdiocese is criticized because "abusive priests," who were assigned to "restricted" ministries precisely to reduce their exposure to children, nonetheless "still were permitted to wear clergy attire in these placements and in public, which certainly could be expected to assist pedophile or ephebophile priests in gaining access to and the trust of young children."
In a concluding section, with edict-like recommendations, Mr. Reilly insists that the church give up its "misguided devotion to secrecy" and its "code of silence." The archdiocese "must adopt a new spirit of openness" and "must train all priests . . . to recognize and respond to and report signs of abuse" and "assure that applicants to the priesthood undergo psychological testing and background checks." Finally, "the Archdiocese must undergo regular independent audits to assure institutional compliance with each and every provision" of new and revised policies and procedures. ....
Mr. Reilly's report makes a disturbing revelation in a concluding footnote. Commencing April 2002, his office "initiated regular meetings with top officials in the Archdiocese to discuss immediate and long term changes to the archdiocese's policies and procedures" and "obtained an agreement from the Archdiocese to review any revised policies or procedures before their adoption and publication."
The attorney general had little choice in exonerating the archdiocese of criminal liability. Mr. Reilly admits that Massachusetts' statutes at the time were inadequate to support prosecution. However, he fails to note that a 1982 precedent case decided by the Supreme Court likely would have deemed it unconstitutional to prosecute the archdiocese even if state law had criminalized such administrative failings. In that case, the court exonerated the NAACP from liability for damage from violence that attended an NAACP-sponsored boycott of white merchants in Claiborne County, Miss., because it was an association engaged in First Amendment-protected activity--which, in the NAACP's case, was political and social change: "A court must be wary of a claim that the true color of a forest is better revealed by reptiles hidden in the weeds than by the foliage of countless freestanding trees." The same protection almost certainly would apply to an organization engaged in religious activity.
Gee, won't all these Popes get in each other's way? Didn't the Church go through all that in the 14th Century?
Enron Game Called On Account of Reality II: Remembering Mr. Fastow(0) comments
Remember Mr. Fastow? The architect of all - or, at least, most - of the supposedly fraudulent transactions that brought Enron down? Well, he's been indicted on charges mostly relating to his alleged corruption of some individual bankers, but also including charges of fraud against Enron and for taking kickbacks.
But when it comes to the main attraction, how does the reader think the settlements reached between J. P. Morgan Chase and Citigroup and government regulators will play in front of Mr. Fastow's jury?
The prosecutor presents the suspect transactions as obviously and egregiously fraudulent .....
... but admits that all possible charges against the banks that created, marketed and financed those very transactions were settled in agreements in which the banks admitted no wrongdoing.
And then the prosecutor can explain how everything depends on some weird distinction between "knowing" and "intending" fraud in a transaction which admittedly met legal and accounting requirements.
You see, ladies and gentlemen of the jury, it all has to do with the pineal gland!
And then there are the transactions in which the informal accounting rules-of-thumb would have been met, except for some essentially marginal pledge of a cash collateral account with a comparatively small amount of money in it. So Mr. Fastow is to go to prison in that case for breaking an informal rule of thumb.
Sure. O, yes. Sure.
The jury will buy all that.
Davis Descending XXI: Salvation(0) comments
Gray Davis will not be removed from office in the upcoming recall.
The California legislature has now passed a budget, which the Governor will sign.
That means that the Governor can turn full-time to demonizing the recall proponents. The negative publicity from the budget battles will now end, so his campaign will be meaningful. The percentage of voters favoring the Governor's recall has never been more than 51% - and that will now improve.
Barring some unexpected disaster, Mr. Davis is home free.
But it's unlikely he's ever going to the White House.
The New York Times eats crow - excuse me - reports:
After more than a year of criminal and regulatory investigations, the nation's two largest banks agreed yesterday to pay almost $300 million in fines and penalties to settle accusations that they aided Enron in misrepresenting its true financial condition for years before the company collapsed.
The settlements, with J. P. Morgan Chase and Citigroup, are the broadest to date reached with advisers that played roles in the financing and structuring of the off-the-books partnerships and transactions that contributed significantly to the collapse of Enron in December 2001. ... But the bank settlements — reached with the Securities and Exchange Commission and the Manhattan district attorney's office — have significance far beyond the issues in the Enron case. That is because, for the most part, the transactions between Enron and the banks met legal and accounting requirements but still led to what regulators said was misleading information in the company's financial reports. ...
Under their settlements, the banks neither admitted nor denied any wrongdoing. ....
The district attorney's office said it would not prosecute individual employees of J. P. Morgan Chase or Citigroup for their conduct related to Enron. The S.E.C., though, said in a statement that its "investigations relating to Enron and Dynegy are continuing." A spokesman for the S.E.C., John Heine, declined to comment on whether that would include investigations of individuals at the banks.
Legal experts said the banks could hardly have refused the settlement offer because both still face lawsuits from Enron shareholders who lost money in the collapse. Under the securities laws adopted in the wake of the corporate scandals since 2001, settlement money that goes to investors through the government can be counted against any final settlement of class-action suits.
"From the defendants' perspective, this is a no-brainer," said John C. Coffee Jr., a professor at Columbia University Law School. "This money is going to do double duty. It settles all charges and it is going to go as a credit against the private class action." ....
Although the regulators extracted fines, the complexity of the deals made it difficult to prove that the banks had knowingly committed fraud, Mr. Morgenthau said, after a reporter asked why he had not prosecuted the banks. "We'd have to show intent to defraud, but we didn't feel we could show that here."
But Mr. Cutler said that the S.E.C. had filed a complaint in United States District Court in Houston contending that J. P. Morgan "aided and abetted" Enron's financial manipulations. "We thought we could prove they were at least reckless," he said.
The investigations have gone on for over a year. Where we are in the Enron game? Well, this pretty much sums up the legal status of the cases: Under their settlements, the banks neither admitted nor denied any wrongdoing.
Does that read like a big win for the governments in a case the New York Times has often and violently asserted manifests the most open and obvious fraud? In announcing the settlements, the various government employees involved do say nasty things about the banks, and how meaningful the settlement really is. That way, the regulators show how meaningful they really are. As the Wall Street Journal puts it:
Morgan ... issued a statement yesterday that insisted it "neither admitted nor denied the SEC's allegations." So the bank's official position is that it did nothing wrong but swears not to do it again. This is hardly reassuring about the bank's sense of responsibility, especially because the settlement depends on the bank's willingness to consider its lending decisions in the light of more than the letter of the law.
Simply put: settlements like these that do not require the defendants to admit any wrongdoing whatsoever are not meaningful no matter what the defeated regulator says. These are settlements by regulators who have nothing, nothing at all, and know it.
For example, the regulators imply that the banks "knew" that Enron was engaging in fraud - but that the governments can't prove that the banks intended to facilitate those frauds. The Journal is remarkably obtuse on this point:
On this evidence, the banks should consider themselves fortunate to have avoided criminal sanctions. One reason is because the law distinguishes between knowledge and intent. While the banks knew they were helping Enron cloak its books, it's more difficult to prove that they intended to commit fraud. The banks are also huge companies, with cross-cutting responsibilities, in which it is difficult to prove individual culpability beyond a reasonable doubt.
Really? These regulatory lawyers slice the baloney at least as thin as any of Enron's financial professionals they criticize. The decision not to prosecute or even bring a civil action against the banks is all predicated on the difference between the banks "knowing" they were facilitating fraud and "intending" to facilitate that fraud? If that were true, then why don't the banks admit in the settlement that they knew they were facilitating fraud? Why didn't the regulators require that the banks make that admission? And remember that this is a settlement of civil claims - meaning, contrary to the Journal's insistence, that the regulators would not have been held to a "reasonable doubt" standard at all, only a "preponderance of the evidence" standard. And criminal procedural safeguards like the exclusionary rule would not have applied, making proof all the easier for the government. Yet the governments decided not to go forward.
The settlement does change the banks accountability with respect to future transactions. But even with respect to those changed standards, the banks are making no admissions as to how the law (as opposed to the banks' "current standards)" would have applied to the supposedly fraudulent Enron deals:
Charles O. Prince, chairman and chief executive of Citigroup's corporate and investment bank, wrote, "The Enron transactions do not reflect our current standards and they would not happen now -- and will not happen in the future -- at Citigroup." .... Some lawyers viewed the proposed changes as toothless, because they don't carry any enforcement threats if the banks fail to comply.
It took a year for the government to get to this point? I noted long ago, that the banks obviously "knew" about those transactions and their effects when I asked with disbelief:
We are then further asked to assume that Citibank and JP Morgan (and the investment banks employing the financial analysts who were supposedly “misled” by Enron’s “opaque" financial statements), banks which maintain large staffs creating “off balance sheet” products these banks sell on a regular basis didn’t know how to analyze them or realize the risks they created.
Of course the banks knew about those “off balance sheet” products and the risks they created. But, lest it pass by like a blur, one should note the admission (apparently on the part of the Times and the governments) that the transactions between Enron and the banks met legal and accounting requirements. My, my, my. The transactions met legal and accounting requirements. So what if those transactions "still led to what regulators said was misleading information in the company's financial reports" - the banks don't admit that in the settlements. Morgan's press release denies it.
And, even if the banks did admit that, the financial incentives the banks have to settle obliterates any attempt to construe these settlements as admissions of significant wrongdoing by the banks:
Legal experts said the banks could hardly have refused the settlement offer because both still face lawsuits from Enron shareholders who lost money in the collapse. Under the securities laws adopted in the wake of the corporate scandals since 2001, settlement money that goes to investors through the government can be counted against any final settlement of class-action suits. "From the defendants' perspective, this is a no-brainer."
Amazingly, state prosecutors frankly admit they could not show any intent to defraud, while the feds say that they thought they could prove that the banks were at least "reckless" - which for these purposes is high negligence while being aware of the risk one is creating. So the feds are admitting that they couldn't prove "fraudulent intent" either.
Think about that.
As I noted in one of my prior posts on this topic:
Could it be – O heresy of heresies! – that Enron did not fail because of fraud? Could it be that the worst its accountants, attorneys and related professionals – and perhaps even its officers and directors – are guilty of is lack of imagination or maybe mere negligence? It’s very hard to say from most of the media coverage. But, unfortunately for the orthodox, the most likely outcome is that exactly this heresy is the truth.
No senior Enron officer has agreed to plead guilty - not even Mr. Fastow, who has been indicted on charges only marginally related to the alleged central "fraud" he perpetrated at Enron. Mr. Fastow's former assistant (finance executive Michael J. Kopper) has pleaded guilty to some crimes and cut a deal only after an apparent nervous breakdown resulting from government pressure - which will in all likelihood seriously undermine his effectiveness as a witness, by the same principle that causes juries to discount testimony by witnesses who have been tortured.
Other than Mr. Fastow, no senior officer or member of the Enron board has been charged with any crime, not even Ken Lay or Jeff Skilling.
Enron's main bankers who created, marketed and financed the very structured finance transactions that were supposedly so openly and obviously fraudulent are essentially off the hook for a pittance. Citigroup, with about One Trillion Dollars in assets, will pay $135 million - far less than what it earned from facilitating Enron's actions. Morgan will pay about $100 million.
Enron's accounting firm has been "convicted" only through a bizarre and exceedingly dangerous misreading of the law which will be eventually overturned, by a jury which refused to accept the confession of the Andersen partner and rejected as a joke the government’s assertion that the Enron paper shredding was an obstruction of justice.
The settlements impose a higher degree of intrusiveness on the part of the banks in a borrower's financial reporting, which some lawyers view as toothless, because they don't carry any enforcement threats if the banks fail to comply. So, in the future, the SEC can expect to get little memos from commercial banks saying something like "We have just completed a transaction with our client, X-corp which meets all legal and accounting requirements, but we thought we would tell you about it because it might nevertheless still lead to misleading information in the X-corp financial reports." Huh?
And, by the way, if Citigroup had all that copious "knowledge" of how bad they and Enron had been, and how hopeless the Enron financial situation was - what does that say about Robert Rubin when he called his former Treasury subordinate to ask for federal intervention to save Enron? Did he share all that "knowledge" when he attempted to induce highly material actions on the part of that government operative - as Mr. Rubin was required by federal law to do? And is it really true, as the Journal says, that Sandy Weill's recently announced decision to retire as CEO also removes the issue of responsibility at the top - even setting aside the fact that Mr. Weill will remain Citigroup's Chairman of the Board for at least two years?
My father would occasionally wisely counsel me with the old nostrum: Son, if you can keep your head while all about you are losing theirs, you probably don't understand the problem. It would be a good idea to keep that nostrum in mind while reading a review of the life of Charles Kindleberger - a good, now physically defunct, economist - in the Economist magazine, which muses:
Perhaps more interesting has been the reaction of those most loth to abandon rational Homo economicus. Only a few old believers cling to the idea that the rise in dotcom share prices genuinely reflected likely profits, and that their sudden plunge was caused by regulatory (in)activity. Most prefer to ask why informed, rational investors failed to arbitrage away the absurdly high prices caused by irrational buying, as efficient-markets theory predicts.
What accompanies is a partial list of non-rationalistic and "market failure" approaches that have been tendered to explain the "dotcom bubble" - including the inevitable reference to “behavioural” economics. But the article's best quote is from Peter Garber: “Academics increasingly say there is a bubble as a substitute for thinking hard about the fundamentals of security valuation.”
Well, like the Marines, the Man Without Qualities vows to leave no rational Homo economicus behind! I don't think the dotcom run-up was much of a bubble. So allow me to cling - if not to the odd misstatement (or at least "misleading" statement) of rational economics proffered by the quoted language, at least to a concept more focused on investors buying discounted future profits than those appearing in the article's list. By way of background, I note that a Man Without Qualities a post written some time ago promised to return to the question of whether the dot com run-up was, indeed, a "bubble" in the sense that it was dependent mostly or entirely on "greater fool" buying and selling. This post is an attempt at that long-delayed return.
Unfortunately, I have to base my analysis on anecdotal evidence. I have not located any good systematic study attempting to ascertain what dotcom investors thought they were doing during the run-up (efforts of "behavioral" economists known to me are not to the contrary - despite all claims). Considering the amount of money involved, the effects on the economy and all the shouting about whether the dotcom run-up was or was not a "bubble," that is perhaps surprising. But, then, it is constantly remarkable that the participants in many big-time social science shout outs prefer to exercise their lungs rather than actually do hard research. A situation similar in at least that respect is the topic of a New York Times magazine article on the infamous and 100-year-old topic of repressed traumatic memories, as described by a researcher who actually did some research and of course got into hot water for doing it: ''You had two groups in opposite camps that were battling each other out'' over the validity of recovered memories, Clancy says. ''But nobody was doing research on the group that was at the center of the controversy -- the people who were reporting recovered memories. Memory function in that group had never been examined in the laboratory.'' Returning to the dotcom-as-bubble question, if somebody has actually spent time out of the sun checking the relevant central facts, I would be pleased to hear about it.
I believe that much of the dotcom investor belief in the dotcom (or internet) sector was rational, although much of it may have been mistaken. Generally, economists cannot re-run experiments as, say, a physicist or biologist can. Which means that economists are often reduced to more imperfect “tests” of their hypotheses. And those tests often confuse "rational belief" with "correct prediction." How can an economist - or anyone - reliably distinguish between a stock run-up based on a rational but false belief from a stock run-up based on irrationality? [Is it a coincidence that many of those who most easily believe in irrational "bubbles" seem (anecdotally) often to be people who easily pass from the observation "we have discovered no weapons of mass destruction in Iraq" to the conclusion "those who asserted there were weapons of mass destruction in Iraq must have been lying?"] There is no easy answer to that question - and that gap allows for a lot of bad economists to propose easy, seductive "irrational" or "bubble" hypotheses for which certain actors in the media and politics have an unhealthy appetite. By way of example only, John Kenneth Galbraith was an especially bad specimen of this species of hyper-articulate, bad, economist - a man who produced a seemingly unending series of such wonderful, awful ideas.
One way to distinguish some "rational false belief" run-ups from "bubbles" might be to examine the subjective psychology of the investors involved, since many (but not all) "bubble" arguments seem to involve a segue onto such terrain. The dotcom run-up was not accompanied by the general euphoria the normally accompanies bubbles - which of course suggests that the dotcom run-up was not a bubble at all. Of course, in Silicon Valley, certain niches on Wall Street and some pendant venues there was general euphoria - but that's not the relevant investor population. For one thing, the denizens of Silicon Valley spent the money, they weren't the source of it (it was said - mostly by people who don't understand the mechanics modern securities issuance - that Silicon Valley's main export was paper, as in the paper supposedly used to print stock certificates). In fact, during the dotcom boom, a large cadre of highly qualified and articulate investment professionals always and loudly preached that the whole thing was a stupid and expensive mistake. Value fund managers and "old economy" players were also squeezed, and they howled and expressed their skepticisms, too. Yes, each such skeptic was dismissed by dotcom investors with the aplomb all-night revelers at a West Hollywood club might use to dismiss a Calvinist preacher: "They just don't get it." But the dotcom run-up swam against a substantial and broad counter-current. What were dotcom investors expecting?
During the run-up I found it never hard to make even a committed dotcom investor admit that almost any identified dotcom company - even one in which the investor had just invested - had a business plan that made as much sense as the plot of a 1930's screwball comedy or the then-most-recent Clinton Administration plan for dealing with North Korean nuclear weapons. There were a few exceptions, such as Amazon and AOL, where a wide class of investors seemed to actually, subjectively, think that spectacular profits for those particular companies were within reach, although even with those companies there were plenty of nay-sayers bearing what could have been highly persuasive arguments. Why did those arguments not persuade more people, especially people who readily admitted that most dotcom business plans were loopy?
Well, because if confronted with weaknesses in particular investments, dotcom investors generally moved to a broader argument: Yes, this particular company you criticize has a loopy business plan ("Pets.Com" or "eToys.Com" or whatever). But, after all, in a classically competitive market any single, particular company has measure zero. While I may not believe in any particular dotcom company, I do believe that the internet is coming, and I hope that one or more of the stocks I buy for my portfolio will connect with that future. Such dotcom investors were certainly not expecting "likely profits" (as the Economist puts it) from any particular stock - but they were investing with a belief in a very unlikely but positive chance of an enormous return from at least one stock. In that sense internet investors may have been very rational in their diversified-up-to-the-sector approach to investing. Within the dotcom sector, investors were usually saying that they admitted to an almost complete inability to distinguish good business plans from bad.
But relocating the source of dotcom investor willingness to invest in their belief in the dotcom (or internet) sector still means that one has to ask: was that belief rational and, in any event, why did it end?
In brief: The belief of dotcom investors in those investments seemed to be based on a broad belief that the internet would permit widespread disintermediation of many middlemen (sometimes replacing them with much more efficient internet middlemen), as well as the elimination of whole classes of free riders and especially elimination of much regulatory and tax drag. In this sense, the dotcom run-up partially concealed a striking political agenda: the regulatory and tax drag that held the "old economy" to a growth rate of, say, 3% would give way - and a "new economy" freed by technology from regulatory and tax drag would boom along at, say 7% growth for the indefinite future. Instead of physical book stores, for example, that would be plagued by local taxes, local utility rate gouging, union demands, historical societies imposing design restrictions, and so on - Amazon would exist "nowhere," free from all that. Many of the "free riders" and "intermediaries" that bog down commerce and growth were thought to be eliminable. The famous de facto elimination of sales tax for e-tail purchases fed the belief that this political structure could maintain itself.
Again focusing on the psychology of dotcom investors: Developments in the Microsoft anti-trust case played a pivotal role in reversing dotcom investor confidence - an effect which clearly occurred but is not well understood. But the image of a no-neck federal judge, a creature from the briny depths of the old economy, reaching out from the beltway in a serious attempt to demolish the most successful technology company in history on the basis of flaccid, efficiency-reducing legal theory, seems to have put the brakes on investor confidence that the internet sector could avoid the regulatory and tax drag that holds down the "old economy." Once that investor confidence was gone, some of the most important rational underpinnings of the dotcom run-up collapsed. The Microsoft anti-trust action was justified by the urgent argument that Microsoft had leveraged itself into a commanding control position of the exact same hyper-profitable internet-dominated future on whose arrival the “irrational” dotcom investors were relying. The anti-trust action has quietly and gradually subsided into the bogs of intellectual embarrassment in which it belongs. But if the dotcom investors were “irrational,” how could the Microsoft action not have been “irrational.”
Were those investor beliefs "irrational?" Well, there are still smart people who argue that unauthorized downloading of music (and, presumably, other intellectual property) from the internet is both good for the economy and cannot be stopped by the government or private parties. Perhaps the internet will eventually gnaw through more of the "old economy" regulatory fabric. And, yes, recent history has shown that most of those dotcom investors were making some big mistakes, at least as to the timing of the arrival of an internet-dominated future and the prospect that a particular dotcom portfolio might contain at least a few winners, or at least survivors. But making mistakes is not in itself irrational. Some dotcom business plans have now materialized or evolved that seem to at least have a reasonable prospect of making reasonable profits, Amazon and especially e-Bay being the currently best known examples. But it is certainly not irrational for investors to misjudge the date a particular technology will transform the economy. I wonder if, say, ten years from now, the retailing sector has become mostly internet-based, if many people will be arguing that the dotcom run-up was a "bubble" - or just a premature guess? Isn't it too early to tell?
Further, while there surely was substantial "greater fool" trading, especially towards the end of the run-up, there is always "greater fool" trading going on in the market - every "momentum fund" is arguably based on that process. And, yes, there was too much liquidity in the market - a "money bubble." The Fed had increased the money supply greatly. But a focus on the money supply and general liquidity cannot answer the question: Why did that money go so much into stocks - especially internet stocks, instead of, say, housing, as has more recently occurred? While "greater fool" trading and liquidity effects were exaggerating features of the dotcom run-up, they do not seem to have dominated it.
Monday, July 28, 2003
The once-mighty Walt Disney Company is so weakened that it is not even attempting to compete in the once-in-a-corporate-lifetime auction of Vivendi's American entertainment assets.
The Economist has an interesting article describing just why Disney's pump head in chief simply must go now.
While the article is good, the Economist also displayes some confusion, as can be seen by comparing these two curious excerpts:
ABC must go: The thorniest strategic problem facing Mr Eisner is how to stop the ABC television network losing millions of dollars each year. ... In the long run, though, says a former senior executive at Disney, the network is an “albatross” around the firm's neck and should be sold. As cable and satellite channels draw audiences away from broadcast networks that have only one source of revenue—advertising—only the strongest will survive the squeeze, he says. ABC has been out of the top league for too long.
But Disney should probably be sold: The likeliest suitor is Comcast, which could marry Disney's content with its distribution power. Comcast's executive vice-president, Stephen Burke, knows Disney's assets well, since he was president of ABC Broadcasting until 1998. The return of the lost leader; now there is a plot Disney should be able to understand.
So let's see if I've got this right. Disney needs to jettison ABC, but Comcast should buy Disney because Stephen Burke knows a lot about the ABC assets that have to go. If that's a plot Disney should be able to understand, then Disney is in even more trouble than the Economist understands.
But it's a good article, anyway. And it does suggest why Michael Eisner's mess is now getting so big, so fast, that if the Disney board doesn't act more quickly than it is probably going to do to get rid of him, the company may really go the way of the House of Usher - or Eisner - in not too much time.
... is not all that different in substance.
"We have to diffuse the perception in reality of American occupation. The obligation of the United States government is to rapidly internationalize the effort in Iraq, get the target off of American troops, bring other people, particularly Muslim-speaking and Arab-speaking Muslim troops, into the region. The president clearly doesn't have a plan to do that, and we're paying a price for it.
Senator John Kerry, as quoted by The Guardian
For that matter, what is one to make of "the perception in reality of American occupation?" Surely some Bush mole tossed that in.
And did Yale-educated Senator Kerry really say "diffuse" (which means to pour out and permit or cause to spread freely) rather than "defuse" (which means to make less harmful, potent, or tense) or was that part just The Guardian at play? On the other hand, since "We have to diffuse [or defuse] the perception in reality of American occupation" does not appear to be an actual English sentence assuming either choice of vocabulary, perhaps the choice doesn't matter.
And, finally, what to make of: "The president clearly doesn't have a plan to do that, and we're paying a price for it?" Well, depending on what "that" turns out to be after the Senator's grammar and vocabulary is unpacked, maybe it's a price worth paying.
He just seems weirder and weirder.
(via Brothers Judd and Tacitus)