Posted 4:13 PM by Robert

Academic Ju Jitsu?

From the perspective of my faculty contacts at Harvard, the overall approach of this Washington Post survey of Harvard President Larry Summers' troubles is utterly out of focus. The Post article gives far too much emphasis to the various public Summers/Harvard crises (sex-in-science, Cornell West, gays in the military and military on campus, etc), and pays far to little attention to the particulars of Mr. Summers' management style, preferring to stick to almost contentless generalities. Is he a "strong leader" or is he a "unilateralist?" Who cares! The real question is: has he been trying to shift the basic faculty/administration power structure at Harvard and, if so, is that a good or a bad thing? This is not something that can be decided without looking at actual incidents - and the Post provides none at all.

But the Post article does, apparently almost unwittingly, provide some glimpses of the Harvard/Summers show - glimpses that may have a significance quite other than the significance assigned to them by the Post. Consider these passages:

Last week, Summers (who is addressing the Harvard Club in Washington this evening) struck a very different tone.

"You know, universities like ours were structured in their basic structure many years ago, and it's probably an exaggeration but not too much of one to say that they were designed by men for men," he said. ....

There is a strange disconnect, however, between many of the alumni and the faculty of arts and sciences. ... Harvard's ... faculty voted by a decisive margin a lack of confidence in Summers's leadership. ... The vote was widely seen as reflecting long-simmering discontent with Summers's leadership, with what many view as an authoritarian streak, and a general dislike for [this] man ....

Summers is called "unilateralist" and "arrogant" by his critics; his supporters argue that only a strong leader, like Summers, can break down age-old barriers at the university -- make it more competitive, increase the flow of knowledge across departmental lines and among the many different schools and institutes that make up the unwieldy beast known as Harvard University. ....

Judith Hope, a former member of the Harvard Corporation -- a seven-member group that includes the president and tends to act with unanimity -- says Summers was chosen because he's a visionary. Harvard has huge challenges in front of it, which only a man of Summers's skills can handle, she says. Those include a massive expansion plan, across the Charles River, into the Allston neighborhood, where Harvard has been quietly buying up land for at least a decade; a major overhaul of the undergraduate curriculum; and the creation of a more centralized university, where the various schools and institutes and departments and faculties work together for mutual benefit. ....

It's not about academic freedom, [some critics of Summers on the faculty]argue. Or about political correctness. Or Lawrence Summers's right to speak his mind. The idea that Summers is simply getting the flak that comes to any strong leader, any change agent, any visionary, rankles..."

Perhaps the most striking disclosure in this article is the comment of Judith Hope, a former member of the Harvard Corporation -- a seven-member group that includes the president and is the ultimate authority at the University: Summers was chosen to facilitate the creation of a more centralized university. In other words: Mr. Summers was hired to reduce faculty authority - which is exactly what my Harvard contacts have been telling me he has been doing, and exactly what the faculty is up in arms over. Whether Harvard should or should not be more "centralized" and have less faculty input is a separate question. But Ms. Hope's admission strongly suggests that the ongoing brouhaha on the Charles is not just between Harvard's President and its faculty - the real fight is between the faculty and the Harvard corporation.

The Post article also suggests that Mr. Summers may have hit upon the beginnings of a nice counter strategy to the faculty's actions: turning against the faculty the very same public disputes that the faculty have to some extent been using as a flashy pretext for their actions - especially the sex-in-science imbroglio that the media finds so riveting. Mr. Summers (and the Harvard corporation) wish to restructure the University, and what better reason to restructure a university than to "admit" that universities like ours were structured in their basic structure many years ago, and it's probably an exaggeration but not too much of one to say that they were designed by men for men? Starting from that premise, Harvard has a positive obligation - especially to women - to junk its existing structure and meet the needs of the 21st Century! (Which just happens to be what Mr. Summers and the Harvard corporation want to do.)

Academic Ju Jitsu. Will it work? Mr. Summers and the Harvard corporation are very clever people. But so is the Harvard faculty - and just about any one of them can leave Harvard for just about any other academic institution in the world.

In the mean time, everybody involved may want to pay especial attention to what is happening to Morgan Stanley right now. It might help to concentrate the minds in Cambridge to see what it looks like for an apparently dominant and unassailable institution to blow itself up from within.

Posted 2:10 PM by Robert

The Amazing Shrinking Enron Scandal II: Even The Goat (Mostly) Escapes?

The Economist has also reviewed Kurt Eichenwald's book on the Enron scandal, CONSPIRACY OF FOOLS - A True Story, and (along with the New York Times) construes that book as absolving Messrs. Lay and Skilling of crimes - although not of gross negligence and incompetence - as in this passage:

If Mr Eichenwald is broadly correct, it will make depressing reading for the prosecutors who have accused Enron's former top bosses, Kenneth Lay and Jeffrey Skilling, of being the brains behind this massive fraud. Mr Eichenwald's criminal mastermind is Andrew Fastow, Enron's chief financial officer, who has already admitted numerous offences and is likely to be the main witness against Messrs Lay and Skilling. Mr Eichenwald describes how Mr Fastow and his henchmen, principally Michael Kopper, created a series of investment vehicles - such as LJM, the Raptors and Chewco - that bought assets from Enron, supposedly to reduce the firm's risk but in reality to generate huge fees and profits for Mr Fastow and his chums. Mr Eichenwald leaves the reader with the strong impression that Mr Fastow lacked even a basic understanding of the risks involved in this off-balance-sheet strategy.

As for Mr Lay, he seems to have known presidents George Bush senior and junior far better than he knew what was going on within Enron. Right to the end, he is described as failing to grasp the severity of the problems facing the company he built. Mr Skilling, too, seems entirely unaware of the crimes being orchestrated just below him in the corporate hierarchy - drinking too much, and swinging manically between jovial over-optimism and deep depression. His decision to quit suddenly as Enron's chief executive soon after taking the job (and just weeks before the company's problems started to become clear) comes across as entirely in character and unrelated to the fraud.

The Enron financial statements supposedly misrepresented the risks to which the company was exposed - it is the failure to describe those risks that caused the financial statements to not fairly reflect the financial condition of Enron. But if, as the Economist construes Mr. Eichenwald's presentation, it is true that Mr Fastow lacked even a basic understanding of the risks involved in this off-balance-sheet strategy how true can it be that Mr. Fastow committed intentional fraud in doctoring the Enron financial statements with those very off-balance sheet devices? Doesn't Mr. Eichenwald's approach (as summarized by the Economist) lead to the conclusion that the misrepresentations in Enron's financial statements were the work of a man who simply didn't understand the risks he was misrepresenting? If Mr. Fastow didn't understand those risks, then even his actions would amount to at most gross negligence - which is not a basis of "actual fraud." And by now-common agreement Mr. Fastow was the worst of the bunch and the center of the "conspiracy."

And so it would be that the entire Enron scandal would be exposed as the result of mere gross negligence and incompetence - in effect, a very expensive "O, never mind?" Mr. Eichenwald doesn't actually reach any such conclusion, and actually seems to castigate Mr. Fastow as the master-criminal. But it's hard to see how one becomes a master criminal by misrepresenting risks about which one "lacked even a basic understanding."

Posted 9:53 AM by Robert

Vuja De IV

One of the more remarkable aspects of the preposterous over reaction to the Enron scandal is that most of the adverse consequences to the various "reforms" enacted in the wake of the scandal and government enforcement actions taken in response to the scandal were well foreseen and publicly articulated at the time such "reforms" were enacted and such actions were taken. Fallout from the absurd Sabanes-Oxley legislation has already begun in earnest - and it all has exactly the qualities predicted when Sarbanes-Oxley was perpetrated. One could write for many pages on how Sarbanes-Oxley defies cost-benefit analysis and is especially harsh for smaller companies ("The costs, and practical and financial consequences, appear disproportionately harsh to smaller issuers. While the actual costs of legal and outside accounting fees may be the same, the fiscal consequences are more significant for micro, small, and mid-cap issuers as a percentage of their revenues and net income.").

The federal legislative action coincided with the amazing federal persecution and annihilation of Arthur Andersen, about which the Man Without Qualities noted at the time:

Now, whatever else the accounting industry may lack, it does not lack for political activism and sophistication, and it has plenty of "political power to utilize the state." Indeed, with the obliging annihilation of Andersen by the Department of Justice, the accounting industry is now positioned as something approximating a good old fashioned oligopoly - complete with the new "independent oversight board" to serve as its monopolistic, rent seeking coordinator. Indeed, once the dust from the Andersen demolition job settles, it will be interesting to calculate the Herfindahl-Hirschman Index of the accounting market. Would the anti-trust division at the Department of Justice have allowed the big accounting firms to achieve by merger the same level of market concentration that the Department has itself imposed through prosecution of Andersen? A concentrated national oligopoly of a key industry with its own, private, independent regulator! How comfy cozy for the regulated.Wasn't it nice of the Congress - and especially the Democrats in Congress - to do this for the big accounting firms, even as those firms pleaded with the Congress "please do not fling me in that briar patch."? Brer Rabbit hollered out, "Born and bred in the briar patch. I was born and bred in the briar patch!" And with that he skipped out just as lively as a cricket in the embers of a fire.

Now the consequences of the market concentration and restrictive regulatory environment have started to come in, and there seem to be no surprises whatsoever. Indeed, an astute and helpful reader has forwarded to me the following announcement:

"A Clash of Policies: Arthur Andersen vs. the Department of
Justice"
BY: EMILIE R. FELDMAN
Harvard University
Harvard Business School
Date: March 25, 2005
Contact: EMILIE R. FELDMAN
Email: Mailto:efeldman@hbs.edu
Postal: Harvard University
Harvard Business School
Soldiers Field
Boston, MA 02163 UNITED STATES
ABSTRACT:
Andersen's demise in an already concentrated market for the provision of auditing services to large public firms is expected to increase market power and the prices of auditing services. This paper first documents the increase in concentration. Since Andersen's exit was driven by a choice of public policy, an appropriate reference point for appraising the concentration changes is the Department of Justice's 1992 Merger Guidelines' delineation of acceptable concentration levels and changes. These suggest that Andersen's disappearance, viewed as if it were a horizontal merger, would have violated those Guidelines. Consistent with this prediction, we find evidence of anticompetitive price changes for auditing services. Percent changes in audit fees are found to be significantly correlated with percent changes in market concentration, and former Andersen clients are shown to have faced significantly larger increases in their audit fees than other firms that changed auditors within the same time period. The paper concludes that the policy of putting Andersen out of business has foreclosed future policy options for the government in its dealings with the accounting industry, the structure of which is now more vulnerable to both criminal and catastrophic civil litigation.

On the other hand, the prosecution and annihilation of Arthur Andersen did help to create a sense that the Bush Administration was "doing something" about the Enron scandal and thereby helped to neutralize the Administration's critics (including many Democrats and sundry writers for the New York Times, including Paul Krugman and Maureen Dowd) who were screaming that the President was in cahoots with the Enron devils.

Nobody can legitimately say that such consequences were not expected or predicted (although many will likely say exactly that). Too bad every investor in a public company, and every single consumer, has to pay for such hysterical decisions every single day ... forever.

Posted 9:57 AM by Robert

The Amazing Shrinking Enron Scandal: Getting The Goat

Kurt Eichenwald, a financial reporter for the New York Times, covered the Enron scandal extensively (as noted here and here), committing some of the more condemnatory and accusatory articles that appeared on the subject. Now Mr. Eichenwald has written a book on the subject, CONSPIRACY OF FOOLS - A True Story, which has duly been reviewed in the Times. But, judging by this review, the tenor of Mr. Eichenwald's book has subtly shifted from that of his articles, for the review includes this passage:

Eichenwald argues that the Enron story is less an account of criminality than of gross incompetence, a ''conspiracy of fools'' in a corporate environment grown so complicated and so given over to the imperative of enhancing share values that no one really understood what was going on. In this telling, complexity itself becomes exculpatory. Thus Kenneth Lay, Enron's chief executive officer, and Jeffrey Skilling, Lay's handpicked successor, come across as unwitting dupes of the nefarious machinations of the company's chief financial officer, Andrew Fastow, and his accomplices.

Curiously, Mr. Eichenwald seems to have been preceded in his belief that Enron management (other than Mr. Fastow) may not have actually broken any laws by none other than Paul Krugman, as I have noted:

Paul Krugman writes that "Enron executives may have deluded and defrauded their shareholders without actually breaking the law." ... Mr. Krugman wants his readers to believe that Enron executives may not have broken the fraud laws at all. Fancy that. This, after the New York Times and countless other media outlets and liberal blogs long ago convicted the entire Enron management team and its board of directors of obvious and egregious fraud. Perhaps Mr. Krugman now also wants his readers to believe that the Enron people may, under current law, be guilty of at most negligence or gross negligence. Where could he have read that? ... Mr. Krugman does not share with us his analysis of the law and economics of the Enron matter that has led him to want to lead his readers into believing that the law may not have been broken after all.

Could it be that all of the officers and directors at Enron except for Mr. Fastow and a few "accomplices" were guilty of at most gross negligence? Would such an outcome be consistent with the huge media and political hoopla this business failure occasioned? No. That coverage requires that a great many people have been up to their eyeballs in fraud, as I noted early on:

Oliver Stone's movie, JFK, competes with Plan Nine From Outer Space to be considered the most incoherent and witless creation ever committed to celluloid - but a movie based on the New York Times coverage of the Enron matter would surely threaten both of those trash classics. As the Stone movie swells to maculate giraffe, a mysterious and wholly-invented "Mr. X" - played with appealing spooky goofiness by Donald Sutherland - "explains" the Kennedy assassination by rattling off a series of unconnected activities that eventually appear to implicate all the United States armed forces, its intelligence services, most foreign governments, the ever-complacent media, Congress, the Vice President, perhaps every male in the Dallas white pages, The Man Who Could, the Woman Who Wouldn't, Moses, Christopher Columbus! It is a conspiracy so vast that it keeps its secrets by the simple expedient of leaving virtually no one outside the conspiracy to whom the conspirators could spill the beans!

Not to be outdone, Patrick McGeehan of the New York Times has today discovered in his breathless excitement that Enron's Deals Were Marketed to Companies by Wall Street! Imagine that.

But Citibank and Chase Morgan - the banks that created and marketed those "shady" products for Enron - entered into settlement agreements with the federal authorities in which those financial institutions admitted no wrong. And the British High Court has held that some of what were supposedly the more "fraudulent" special purpose structures were not fraudulent at all - and were properly accounted for. The Enron scandal just keeps getting smaller.

But what of Mr. Fastow, the Great Satan himself? We are now apparently to believe he did it all with the help of a few "accomplices." He has pled guilty to intentional fraud and received a jail sentence for it. If his plea is true, that pretty much implies that Enron's finanical statements were also fraudulent. But how much confidence does one have in Mr. Fastow's plea? It was obtained under (legally permitted) duress: the threat of imprisoning his wife and depriving their young children of any parental contact for many years. Why was that duress necessary if Mr. Fastow was the epicenter and virtual sole perpetrator of so many gigantic public evils?

Mr. Fastow apparently committed crimes other than fraud - such as bribing bankers. But when it comes to Enron's financial statements and public disclosure, doesn't Mr. Fastow look a lot like a garden variety scapegoat?

Posted 1:14 PM by Robert

Where The Special Prosecutor Is?

From Opinion Journal:

Where's the special prosecutor? A bipartisan cabal of U.S. senators (a k a John Kerry and Richard Lugar) spilled in open hearings yesterday the name of a supposedly undercover U.S. intelligence agent in Latin America as they pursued their Constitutional duty to belabor UN nominee John Bolton over past arguments with WMD analysts. ... Mr. Kerry began reading from transcripts of closed-door questioning with committee staffers, incautiously babbling the name that others were trying to keep out of the public record. Anybody can consult the AP story or the committee hearing transcript from yesterday, available from news services and Congress's own website, to find the name. He's also been mentioned dozens of times in the press over the years, which is hardly surprising given a succession of jobs with high public profiles, like, say, press spokesman for a U.S. congressman and White House national security official.

I make no excuses for what seems to have been perfectly dreadful and irresponsible acts on the part of some Senators. But the special prosecutor was probably smothered by Article I, Section 6 of the United States Constitution, which absolutely protects even the most inane Senate committee statements:

The Senators and Representatives shall receive a Compensation for their Services, to be ascertained by Law, and paid out of the Treasury of the United States. They shall in all Cases, except Treason, Felony and Breach of the Peace, be privileged from Arrest during their Attendance at the Session of their respective Houses, and in going to and returning from the same; and for any Speech or Debate in either House, they shall not be questioned in any other Place.

Posted 8:37 AM by Robert

Safe For Brains


From the BBC:

Using a mobile phone does not increase the risk of developing a brain tumour, the latest research suggests. The Danish study, which appears in the journal Neurology, involved more than 1,000 people. ... A Swedish study published in 2002 claimed to have found a link between analogue mobile phones and brain tumours, but experts have questioned the validity of the findings because of the way the research was carried out.

Danes versus Swedes? It's largely a Scandinavian family affair - with Finland - home of Nokia - perhaps having the most at stake?

Yet, Nokia's stock price has not been soaring.

Posted 9:01 PM by Robert

Thar She Blows! (But Should She?)

The Washington Post provides an update on the story of the man-in-black who faced the Capitol with two black suitcases by his sides earlier today, demanding to speak to the President:

With hundreds of people watching from First Street and near the Capitol Reflecting Pool, bomb squad technicians X-rayed the bags. The results revealed that one suitcase might contain an explosive device because it contained wires, batteries and what appeared to be a timer, [Chief Terrance W. Gainer of U.S. Capitol Police] said.

After "disrupting" the bags with an explosive blast about 3:15 p.m., police determined that the bag contained nothing more than a CD player, batteries and a "watch or something," Gainer said.

Gainer and other Capitol officials said officers acted appropriately.

The Post story seems to state that the Capitol Police didn't know exactly what was in the bag they blew up. Personally, I wonder what the consequences of "disrupting" the bags with an explosive blast would have been if the "disrupted" bag had contained a "dirty" nuclear device or chemical or biological agents. If the bag had contained any of these, wouldn't "disrupting" the bag with an explosive device have actually released deadly nuclear, biological and/ or chemical contaminants into the air just a few feet from the Capitol? Contaminants that might otherwise have remained contained? How could an X-Ray have determined whether or not the bag contained a substantial cache of weapons-grade anthrax, for example?

Other news reports indicate the the Senate was actually in session nearby when the bag was "disrupted" just a few feet from the Capitol, and that tourists had been readmitted to the area adjacent to the "disruption."

Chief Gainer must have his reasons for concluding that his officers officers acted appropriately. I don't see those reasons at the moment. But neither am I willing to pass judgment at the moment.