Man Without Qualities

Friday, August 23, 2002


The Man Without Qualities will be out of the country until early September. Postings will probably be scarce, at best, until then.
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An Enron Insider Pleads Guilty II

As noted in a prior post, some of the first reports concerning Mr. Kopper's plea agreement in the Enron case stated that it was unclear whether he would be obligated to cooperate with the prosecutors. Later reports have confirmed that such cooperation is part of his bargain, which is no surprise. What is surprising is that according to the New York Times :

The guilty plea that handed prosecutors their first conviction in the Enron case also raises questions about what executives hoped to accomplish with the complex partnerships at the center of the scandal. Many believe executives were trying to make the company look good by hiding debt and boosting its stock price. But former executive Michael Kopper's plea said that in at least three partnerships he and others tried to skim millions not for the good of the company, but for themselves.

Is the Times reporting that these three partnerships were not intended make Enron "look good by hiding debt and boosting its stock price?" Maybe not. The Times also quotes Duane Windsor, a business ethics professor at Rice University in Houston:

"Within the general corporate scamming to keep up the stock price, there were personal games of enrichment going on -- that's what his confession essentially amounts to."

But is that really consistent with what the Times says above? Professor Windsor is saying that the partnerships served two ends (Enron's and the individuals) - but the Times doesn't seem to be saying that.

What is interesting is that Mr. Kopper's guilty plea is quite clearly based on events entirely unknown to Enron's critics at the time of its bankruptcy filing. That has not stopped those critics from claiming that Mr. Kopper's plea agreement vindicates their original claims. In fact, the facts described in the Kopper plea agreement - even assuming those facts as asserted are completely correct, notwithstanding the coercive manner in which they were obtained - suggest a rogue Mr. Fastow assisted by Mr. Kopper scamming Enron without the knowledge of other officers. If true, that's certainly criminal behavior. But it is also certainly not what Enron's critics have been complaining about these many months.

If the Kopper agreement had not required Mr. Kopper to cooperate and provide meaningful evidence to reduce or eliminate his prison term - a rare kind of plea agreement - the agreement would been more interesting. In that case whatever testimony and information Mr. Kopper provides might not be so self serving and unreliable, qualities that are the inevitable consequences of the agreement's actual coercive format. Of course, without that format Mr. Kopper might not provide any evidence - so the prosecution had a difficult choice, and probably made the right call.

Nor is it obvious that what Mr. Kopper says in connection with his plea agreement is true at this point. Previously, using similar coercive tactics, the Enron task force obtained the confession of David Duncan to the crime of "obstruction of justice." The Andersen jury in the subsequent criminal action refused to agree that Mr. Duncan had committed that crime even with his own confession in evidence. Enron's critics had also pointed to the supposedly massive destruction of documents as a "slam dunk" and "obvious" act of obstruction. The Andersen criminal jury also refused to agree with that. If the same mind set were applied to these developments as Enron's critics routinely employ against that company and its operatives, one would have to be seriously investigating whether the Enron task force has already committed attempted subornation of perjury in its handling of Mr. Duncan. And since then, the heat on them has only gone up.

It is worth keeping in mind that Mr. Kopper cannot reduce his sentence unless he delivers something or someone of note to the prosecutors, and that by his own admission Mr. Kopper is an opportunistic liar. Of course, that doesn't prove that he is lying now - only that he is either lying now or lied previously about the same set of facts. One can be sure that if Mr. Fastow has to stand trial, which appears likely, his jury will be made to keep those facts seriously in mind.

Further, the concealments from Enron that Mr. Kopper alleges do not appear consistent with the conspiracy of senior officers, board members, accountants, investment bankers, and others long posited by Enron's critics. It is worth noting, for example, that the plea agreement entirely avoids matters in which Andersen was involved.

The Information charging Mr. Kopper is worth reading especially to understand that the crimes to which he has confessed concerning Chewco (for example) deal entirely with shenanigans pertaining to a "missing" 1.5% of Chewco's capitalization. That is, under accounting rules Chewco needed to receive 3% of its capital as independent equity contributions, where the scheme in which Mr. Kopper participated placed half of that amount (or 1.5% of Chewco's total capitalization) in an account pledged to one of the banks financing Chewco. The Information says this meant Chewco failed the accounting rules test required for it to be considered "independent" of Enron - which, in turn, meant that Enron was not entitled to remove the roughly $700 Million in debt from its books. But whatever else was or was not wrong with Enron or Chewco, it is just not the case that Enron's actual financial condition was materially affected by this scheme, which concerned less than $9 Million. A reasonable person probably would not think that whether or not it was criminal or fraudulent for Enron's books to omit the hundreds of millions of dollars of Chewco debt depends on whether Mr. Kopper's few million dollars was pledged to a bank. Put another way: most reasonable people would say that to the extent the question is posed in a criminal case, whether the Enron financial statements fairly reflected Enron financial condition in all material respects just does not and cannot depend on whether an immaterial few million dollars of Chewco's capitalization was pledged to some bank. Did Enron lose its credit rating or run huge losses because of this pledged account? Of course not. A big problem for the prosecution (and any private litigant) is that if the pledge of the "missing" 1.5% had not been there, the structure would have complied with those technical accounting rules. How can this immaterial pledge make the difference between criminal guilt or innocence - or even civil liability - with respect to representations of Enron's overall financial condition? Most reasonable people would say that a pledge of less than $9 million just can't make that kind of difference for a multi-billion dollar company - even if it technically violates an accounting rule.

The 3% capitalization rule is not found in any federal or state statute, nor is it a feature of any SEC or GAAP rule or regulation. It is a practical rule for aiding working accountants, originally worked out in off-shore leasing transactions. Justice Department focus on compliance with this 3% "independent equity" requirement is preposterous, and amounts to a post-hoc attempt to criminalize non-compliance with what is basically a rule of thumb. It is nothing short of bizarre that many of the same people who have argued that it is absurd that a mere 3% independent equity contribution could allow a special purpose corporation to be considered "independent" are now giving talismatic significance to compliance with this rule in a criminal (as opposed to a mere accounting rules) context. Such people are wrong twice. One wants to ask such people if they are now prepared to accept the legitimacy of all the off-shore vehicles which do comply with this 3% capitalization rule, now proffered as critical in determining who spends time in prison.

In sum: The amount of money Mr. Kopper says he obtained by defrauding Enron was large for an individual. But it was not material to a corporation the size of Enron. The status of less than nine million dollars may have caused a technical violation of accounting rules for special purpose entity "independence," but did not and could not materially affect Enron's substantive, real economic condition one way or the other. It's therefore probably not an oversight that Mr. Kopper does NOT plead guilty to securities or bank fraud in this Information. And, as an aside, where are the prosecutors left with respect to their larger case if it turns out that the intent behind Chewco was solely to defraud Enron - and not the public - as the Times seems to suggest?

The political aspects of these recent developments are also interesting. Many of Enron's most vigorous critics have also been critics of the Bush administration, including Senator Daschle. Many such dual-critics have suggested that the lack of Enron prosecutions was evidence of Administration enthrallment to Enron and its circle. But as KausFiles points out, in order to claim that Mr. Kopper's plea is a major indication of Enron's broad culpability, those critics must now acknowledge that the Enron task force has been taking effective action all along. But only a little while ago the Administration's critics felt it was in their interest to highlight the lack of progress.

Indeed, just days ago Paul Krugman thought it worth his effort to argue that "Enron executives may have deluded and defrauded their shareholders without actually breaking the law". But the mere fact that such a vigorous critic of the Administration and Enron has so recently doubted in public that Enron broke the law at all does not deter some of the more naively overdetermined observers from claiming matters have been clear as a looking glass from the beginning, cleaving to an "execution now, trial later" mode of thought.

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Thursday, August 22, 2002

O, Martha III

The evidence of ImClone insider trading against Martha Stewart remains rather thin, in the view of the Man Without Qualities. But evidence of truly terrible judgment on her part is increasingly plentiful. Now there is a suit filed against her by a shareholder in her own company - Martha Stewart Living Omnimedia - alleging that she dumped shares of her own company right after selling her ImClone shares. The theory of the new suit is that Ms. Stewart knew that her ImClone stock sale - even if it was legal and not based on insider information - was so inherently suspicious that it was bound to attract attention and throttle the stock price of Martha Stewart Living Omnimedia. The public, of course, did not know the facts about her ImClone stock sale. Therefore, the new complaint alleges, Ms. Stewart's sale of Martha Stewart Living Omnimedia stock was itself based on insider information.

A separate class action complaint filed by Milberg, Weiss (a law firm strongly identified with the Democratic Party) alleges:

Stewart, along with the other defendants, sold a total of $79 million in MSLO common stock, with many defendants selling nearly all of their MSLO common stock. As alleged in the complaint, the public first learned of Stewart's complicity in the high-profile ImClone scandal on June 6, 2002, with the publication of a media report --setting-off a precipitous decline in MSLO's stock price. The impact of Stewart's involvement in the ImClone scandal on MSLO's business was, according to the complaint, not known to the public until July 24, 2002, when the Company announced that the circumstances were negatively impacting its revenues and earnings, causing MSLO to slash earnings estimates for the third quarter of 2002 by half and reducing guidance for the entire-year 2002. On July 24, the price of MSLO common stock dropped to below $7.50 per share -- a 60% drop in one month.

A one-year chart of the MSLO stock price helps to bring home just how odd Ms. Stewart's timing was.

It's hard to argue with the allegations in these complaints. If any evidence can be found that Ms. Stewart understood that her ImClone trades would tank her MSLO stock before she sold it, these new allegations could make Ms. Stewart's direct ImClone trouble look positively pastel.

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Wednesday, August 21, 2002

The Fall of the House of Eisner?

Michael Eisner's position at Disney bears an increasing resemblance to Edgar Allen Poe's House of Usher:

No portion of the masonry had fallen; and there appeared to be a wild inconsistency between its still perfect adaptation of parts, and the crumbling condition of the individual stones. In this there was much that reminded me of the specious totality of old woodwork which has rotted for years in some neglected vault, with no disturbance from the breath of the external air. Beyond this indication of extensive decay, however, the fabric gave little token of instability.

Similarly, the stories about Michael Eisner's Disney mostly seem to suggest the silent, serious, internal decay of the individual building blocks of the corporation, even as assurances are offered from various quarters that Mr. Eisner on the whole is "well entrenched," while Mr. Eisner is predicting a quick turnaround for Disney. Only a thin zigzag fissure seems to run through Mr. Eisner's position.

One of the odder things about Mr. Eisner is the apparent disparity between his once-undisputed acuity and what has for many years been an increasingly obvious detachment from the creative and management core of his position. It's difficult to point to where this apparent detachment first emerged. One of the key features of a company such as Disney is that so many of its projects require rather long lead times - parks, movies, television shows. Also, the company's assets (film library, licensing deals, and parks) tend to generate revenue in ways that normally change trends rather slowly (at least absent dramatic developments such as the event of September 11). So if something big did change irreparably at Disney in 1994, one would likely expect to see the trends in corporate performance not shift for at least a few years. So it is at least suggestive that under Eisner-led management Disney's stock way outperformed the market from 1985 to the mid-1990's, but after 1997 Disney stock has not performed over the market. Specifically, the stock's performance is consistent with what one would expect to find if something critical - and negative - happened in about 1994. It is also notable that the stock price is now actually about where it was in 1995. And, by many measures of actual performance (as contrasted with the stock price), Disney has not been much better than the market since 1995 - although such results did not go into an immediate decline.

Of course, Disney lost both Wells and Katzenberg in 1994 - events quite independent of Mr. Eisner. Wells was killed in a crash and Katzenberg left in a huff. Eisner was left running Disney more or less by himself.

But also in 1994, Mr. Eisner underwent emergency heart bypass surgery. His survival was uncertain. It was so uncertain that he put the name of his successor in a sealed envelope whose contents were only to be revealed should if he did not survive.

Why bring this up? Because the cause of Mr. Eisner's decline may be that he is -or has - what cardiologists call "a pump head."

A Duke University study appearing in the New England Journal of Medicine in February, 2001, found that a substantial proportion of patients after coronary artery bypass surgery experience measurable impairment in their mental capabilities. Surgeons privately know this effect as "pump head." In the study, patients were tested for their cognitive capacity (i.e. mental ability) before surgery, six weeks, six months, and five years after bypass surgery. Patients were deemed to have significant impairment if they had a 20% decrease in test scores.

This study had three major findings

1) Cognitive impairment occurs after bypass surgery.

2) 42% of patients became impaired.

3) The impairment was not temporary.

Also, the decline in mental capacity in those who had bypass surgery was 2 -3 times higher over five years than in patients who did not have surgery. "Pump head' is not the same thing as depression - although the symptoms are similar. Earlier studies had indicated that cardiac bypass surgery does not cause true depression.

Similarly, experts such as Guy McKhann, M.D., director of the Mind-Brain Institute, say that "Research has shown that anywhere from 25 to 80 percent of cardiac surgery patients experience postoperative declines in their mental abilities--problems with memory, verbal skills or physical coordination."

While Mr. Eisner does not exhibit effects as serious as those noted by Dr. McKhann, it seems reasonable to ask whether Mr. Eisner's increasingly obvious detachment may be attributable to the effects of, and associated with, his surgery - and therefore not easily amenable to correction by application of financial incentives or otherwise. And such a physiological explanation would help explain the increasing common reports from people who know Mr. Eisner that he seems at bottom uninterested in really engaging with Disney's mounting difficulties - preferring pseudo-solutions of an essentially cosmetic nature.

Things seem to be coming to a head at Disney with a distinct accelerando. The quiet but formidable Roy Disney and his business partner, the also formidable if somewhat less quiet Mr. Gold, seem feisty and willing to fight. Mr. Eisner has made himself the company's second or third largest individual shareholder, and struck out against Mr. Gold by a rather nasty filing with the Securities and Exchange Commissison. The New York Times says Mr. Eisner has at least until November to show he has begun to address the problems - but Mr. Eisner will surely try to serve up Mr. Iger as the sacrificial victim for the likely disastrous fall ABC season.

Similarly, while the opening of Poe's story is on the slow, monumental, brooding side, its ending is more rather dynamic:

The radiance was that of the full, setting, and blood-red moon, which now shone vividly through that once barely discernible fissure, of which I have before spoken as extending from the roof of the building, in a zigzag direction, to the base. While I gazed, this fissure rapidly widened—there came a fierce breath of the whirlwind—the entire orb of the satellite burst at once upon my sight—my brain reeled as I saw the mighty walls rushing asunder—there was a long tumultuous shouting sound like the voice of a thousand waters—and the deep and dank tarn at my feet closed sullenly and silently over the fragments of the “House of Usher.”

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Tuesday, August 20, 2002

An Enron Insider Pleads Guilty

Former Enron Corp. executive Michael Kopper is reported ready to plead guilty to two charges of conspiring to commit wire fraud and money laundering and surrender $12 million in "criminally derived'' assets.

These would be the first criminal charges in the Enron investigation. Kopper is described as the "chief lieutenant" to former Enron Chief Financial Officer Andrew Fastow. But Enron Chairman Kenneth Lay told investigators he didn't even know Kopper.

Money laundering?

According to Associated Press, "As part of the plea agreement, Kopper has agreed to cooperate with investigators, a potential watershed event in the investigation since he has knowledge of Enron's innermost workings and financial dealings." But another Associated Report says it is not clear whether he has agreed to cooperate.

It isn't clear from the reports what the nature of Mr. Kopper's to-be-admitted wire fraud was, but a previous report by Enron's board of directors said that Mr. Kopper and his domestic partner, William Dodson, made $10 million on a $125,000 investment in one of the now-notorious Enron partnerships, Chewco, and that "Michael Kopper ... enriched himself substantially at Enron's expense."

So it seems likely that Mr. Kopper has a lot of detailed "knowledge of Enron's innermost workings and financial dealings". If the Justice Department can't obtain convictions now, it won't be for want of information and understanding. Some observors quoted in the various articles linked here now predict something of a rush of other Enron operatives to cut similar deals. Of course, the important thing here is whether these charges of crimes against Enron can be leverged though witness cooperation or otherwise into successful charges of crimes by Enron or its officers against the investing public. It is also interesting that Mr. Kopper is not pleading guilty to accounting, securities or bank fraud, which are the principle allegations against Enron and its operatives. But that may just be part of his deal with the prosecutors.

Mr. Kopper's and Chewco's role in the Enron disaster is described by the Wall Street Journal:

To meet the aim of keeping Chewco separate from Enron, it was essential that outside investors put up 3% of its equity, the minimum required under accounting rules. Mr. Kopper raised this money by getting a loan from Barclays PLC, the British bank, for two paper vehicles he helped create. Known as Big River LLC and Little River LLC, they would act as the independent investors in Chewco. But there was a catch: Barclays would only lend the money, $11.5 million in total, if an Enron affiliate turned around and deposited more than half that amount into two accounts at Barclays, helping ensure repayment. The Enron affiliate complied.

The upshot of this was that Enron backed the loan and that Little River and Big River never had enough of their own money truly at risk in Chewco to satisfy the 3% requirement. Yet for the next four years, Enron treated Chewco as if it did meet the 3% standard, allowing the company to tamp down its debt and bolster its earnings. Last year, when Enron decided to buy out Chewco, Mr. Kopper and his domestic partner, William Dodson, received $12.6 million from the company, a huge gain on the $125,000 they had originally provided to fund Little River and Big River. Mr. Dodson couldn't be reached for comment.

The payout was controversial within Enron. Former Treasurer Jeffrey McMahon told a special investigating committee of the company's board that he had suggested a $1 million payment to Messrs. Kopper and Dodson was fair, but he had been overruled by Mr. Fastow. Mr. McMahon said Mr. Fastow told him that "Skilling was OK with buying out Chewco at that price."

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O, Martha II

UPDATE: Martha has apparently been more generous and loyal that previous reports indicate. The Washington Times says:

So far in the 2002 campaign cycle, Mrs. Stewart has donated $173,665 to Democrats personally or through her company, putting her among the top 100 contributors to either party, according to the Center for Responsive Politics, which describes her as "solidly Democratic." ,,, [The former Chairman of now-bankrupt ImClone], Waksal also is a donor to Democratic candidates, according to the Center for Responsive Politics.


"The fact is, Martha Stewart has been very generous to us Democrats," one top congressional source said on Tuesday. "She's been a generous supporter of Hillary Clinton, John Kerry, Torricelli, Bayh, Schumer and others... We must treat her fairly, pursue the facts, not single her out or punish her because she has been a leading fundraiser for one party of the other."

Who knew? Is this tact good for Martha? Is embracing this tact good for the Democrats? Hard to see how that could be in either case, especially if she is found to be an inside trader? Lucky for all of them, the evidence there is still pretty slim and circumstantial - although the New York Times doesn't seem to agree.
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Black Arts

Reading public opinion polls is among the darkest of the modern black arts of politics. But it can be fun if it is not taken too seriously. Some recent poll results are out, and there are some interesting suggestions in them.

For example, the FOX News/Opinion Dynamics Poll for Aug. 6-7, 2002 asked all registered voters (not likely voters) "Thinking ahead to the 2004 presidential elections, if the elections were held today, for whom do you think you would vote if the candidates were?" In a Bush/Gore rematch, the August, 2002 results were Bush 50% to Gore 37%, where the corresponding December 2001 results were Bush 61% to Gore 23%, and the corresponding June 2001 results were Bush 50% to Gore 38%. That might be read a bad news for Bush, since these results suggest that the boost he received in the aftermath of September 11 has worn off.

But if there is one lesson we should have learned from the fall of the current President's father and the irrelevance of his post-Gulf war poll numbers, it is that the current President is not going to be re-elected on the basis of a post-September 11 afterglow and that whatever boost that afterglow gave his poll numbers will come down.

So it seems to me that the more interesting feature of this poll is that January 2001 results were Bush 39% to Gore 36% - immediately following their bitterly contested election. But by June 2001 (long before the September 11 disasters) Bush had widened the gap to Bush 50% to Gore 38%, as noted above - and bush continues to enjoy what amount to favorable new-President "honeymoon" ratings, even long after the "honeymoon" period has ended and even in the face of the Democrat assault predicated on the July decline in the stock markets.

Also interesting is that Hillary Clinton has lost considerable ground in a hypothetical match-up with Bush, even as the media coverage has suggested that Hillary's star is on the ascent and she has played a high profile role in criticizing the President on behalf of the Democrats. In January 2001, Bush led Ms. Clinton by 45% to 34%, but by August 2002 he has widened his lead to 58% to 28%. What's going on there?

The polls also suggest that Al Gore's lock on the Democratic nomination may be becoming all but absolute. From mid-July 2002 to the beginning of August 2002, the percentage of Democrats saying they will vote for Gore in the primaries rose from 38% to 41% - with his nearest challenger being Tom Daschle at 9%! This rise in Gore's "inevitability" corresponds with vastly nastier and more vigorous criticism of him from within the Democratic Party (including Senator Lieberman) and those in its orbit, such as the New York Times. Many Democrats seem to see Mr. Gore looming in their futures as an inevitable disaster - and some, such as the Times and Senator Lieberman, are making a last-ditch effort to do something about it, including inducing once-faithful Gore donors to back off. But if Gore really has become inevitable, doesn't all this anti-Gore activity within Democrat ranks just create a greater risk of a damaged, bitter, underfunded, schismatic Democratic Party once Gore accomplishes the inevitable?

The Ipsos-Reid/Cook Political Report Poll for August 16-18, 2002 asked: "If the election were held today, would you definitely vote to reelect George W. Bush as president, consider voting for someone else, or definitely vote for someone else as president?"

............................................Definitely Bush..........Consider Someone Else............Vote For Someone Else............Not Sure



This is a curious question. Why is everyone not in the second column? Personally, the Man Without Qualities would definitely consider voting for someone other than George Bush. Why not? So my vote would go in the second column. But it would unwise for the Democrats to seek much comfort in that.

What is also striking to the Man Without Qualities is that the number of people who say they will definitely vote for Bush over anyone else plus the number of people who say they will only "consider" voting for someone else (which one would hope is the norm in any democratic republic) is still fully sixty-eight percent of all registered voters - down from seventy-five percent in June 2001. It is my understanding of polls that when one shifts to "likely voters" from "all registered voters," the Republican showing tends to improve. How could they? These numbers already seem akin to the voting results in the old Soviet Union.

Similarly, the Zogby America Poll for July 19-21, 2002 asked: "Do you think President Bush deserves to be reelected or do you think it is time for someone new?"

...................................................Deserves Reelection..............Someone New......................Not Sure

This question is even more peculiar than the Ipsos-Reid/Cook question because by omitting the phrase "If the election were held today..." the question seems to invite the respondent to evaluate whether, solely on the basis of what has occurred to date, the President "deserves re-election" almost regardless of what happens in the next two years. Or, conversely, to decide whether, solely on the basis of what has occurred to date, someone new "deserves election," also almost regardless of what happens in the next two years. Why is everyone not in the third column? And what is the respondent to make of the phrase "it is time" where the "time" won't occur for more than two years?

In any event, it is striking that about half of all registered voters think the President already "deserves re-election." If half of the "not sure" 21% broke each way, Bush would receive over 57% of the vote - a near landslide, and about ten percentage points more than he received in the 2000 election.

And then there are those curious "approval" ratings - which are sampled not just from voters, but from "Americans 18 & older." The Investor's Business Daily/Christian Science Monitor poll says Bush's "job approval" rating dropped to 61% (with 27% disapproving) for the period August 5 through 9 from 65% (with 22% disapproving) for the period July 8 though 11.

The CNN/USA Today/Gallup Poll for August 5 through 8 says 68% approve (26% disapprove), down from the July 9 though 11 results of 73% approval (21% disapproving).

Bush's related (but not the same) "favorability" ratings for August 5 through 9 are 57% favorable (29% unfavorable) according to the Investor's Business Daily/Christian Science Monitor poll, but were an astronomical 72% favorable (22% unfavorable) according to the FOX News/Opinion Dynamics Poll for August 6 -7, up from 69% favorable (19% unfavorable) for June 4-5.

There are various ways to construe these results. But considering the continuing fade of the post September 11 afterglow, the almost terrifying behavior of the stock markets, the rising reports of corporate scandals in July, and the full-scale effort the President's political critics waged against him on the basis of such developments, Mr. Bush's numbers seem remarkably sturdy. More interestingly, their positive qualities seem increasingly independent of disproportionate influence from September 11.

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Monday, August 19, 2002

Kissinger and Iraq

KausFiles says this excerpt from Henry Kissinger's recent op-ed article on invading Iraq indicates that Kissinger is in favor of delaying invasion:

It is necessary to propose a stringent inspection system that achieves substantial transparency of Iraqi institutions. Since the consequences of simply letting the diplomacy run into the ground are so serious, a time limit should be set. The case for military intervention will then have been made in the context of seeking a common approach.

KausFiles admits nobody else seems to be taking serious note of this Kissinger reservation.

I don't agree with KausFiles' take, mostly on the basis of Mr. Kissinger's caveat that "a time limit should be set." No serious person (including Mr. Kissinger) believes that Iraq will agree to anything similar to what Mr. Kissinger's proposes because Saddam Hussein has already rejected such proposals repeatedly. Mr. Kissinger most likely intends his proposal as a last-line-in-the-sand, a rhetorical device. I believe it is larely to make this point that Mr. Kissinger says quite definitely: "The case for military intervention will then have been made..." There is no effort to explore what might happen if Iraq accepts the demand in Mr. Kissinger's article - and none is needed. It will take the United States a while to gear up for an invasion. Setting a time limit well within the time needed to gear up guts this proposal as a serious potential delaying tactic.

On the other hand, Kissinger's sentences such as "Regime change as a goal for military intervention challenges the international system established by the 1648 Treaty of Westphalia, which, after the carnage of the religious wars, established the principle of nonintervention in the domestic affairs of other states" simply suggest that Kissinger is getting too old for this game. Even for Kissinger that's esoteric silliness. Regardless of whether one agrees with intervention in Iraq, or on any particular set of criteria justifying intervention, asserting that there exists any "international system established by the 1648 Treaty of Westphalia" just stretches to the point of absurdity the concept of an "established system." Such a "system" can be established only in outdated, rarified and theoretical international law. Did Teddy Roosevelt re-read the 1648 Treaty of Westphalia when he took Panama? It seems as though he did intend to affect a regime change by creating a new country. What about all the US incursions in Latin America just in the 20th century? What about the eighteenth century vivisection of Poland? Napoleon's conquest of Europe? The Greek civil war? Did all of that eighteenth and nineteenth century colonialism - including the European conquest of most of Africa, and Britain's complete absorption of what are now the nations of India, Pakistan, Australia, New Zeeland and much else - stem from some mass European librarians' error resulting in all those governments losing access to their copies of the 1648 Treaty of Westphalia? Are we suppose to pretend that these conquests were not interventions in the domestic affairs of the states conquered and turned into colonies? Did France forget to re-read THE TREATY just before French troops took the Ruhr Valley? Wasn't France attempting to change the way things were being done in Germany at the time? Or was a national insolvency resulting in the mere inability of Germany to make payments to France enough to satisfy whatever conditions of the 1648 Treaty system allowed intervention, which Iraq's efforts to acquire nuclear bombs and chemical and biological weapons for use against other nations does not? What about recent actions in Yugoslavia? Would Mr. Kissinger see invasion of Iraq as less of a disturbance of his "established system" if the goal was totally to conquer, absorb, split and exploit Iraq - running it indefinitely from Washington after the invasion - rather than just to change the regime and a few key policies?

In short, what the heck is Mr. Kissinger talking about here, anyway?
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Good Moral Character

Stephen Glass wrote many high profile stories that appeared in the New Republic, Rolling Stone and George and which were filled with fabrications.

He was bounced from journalism. Where did he end up? Why, he's reported to have graduated from Georgetown University Law School and is reported to be working as a law clerk with Washington Superior Court Judge A. Franklin Burgess Jr. or a lawyer in Washington or New York.

What does it say about the legal profession that Georgetown retained and graduated Mr. Glass as a law student? What does it say about the Washington Courts (especially Judge Burgess, who seems rather unconcerned with the rather obvious appearance of impropriety of having a notorious fabricator assisting and influencing the judge's work product) and law firms that he could find employment with one of them? What does it say about the state regulation of attorneys that he could hope to gain admission to the bar of any state?

Whatever it says, it's not a compliment.

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O, Martha!

The Man Without Qualities continues to believe that the Marthagate matter is a sideshow worthy only of ordinary regulatory and investigative processes, and that all of the Congressional committees investigating it should get on to something important, such as calling Robert Rubin to talk about Enron. [Incidentally, this includes the House Energy Committee, run by Republican Billy Tauzin, which is contrary to Counterspin's assertions that "Musil... [is only] attacking Joe Lieberman for not calling Rubin to testify ... Why not go after the ... House Energy Committee Chairman, Republican Billy Tauzin? ... [Musil's] silence is defeaning." Lieberman's committee has been the most germaine, so it is appropriate to have the main focus there. Tauzin's committee is a secondary venue. But the "silence" has only been deafening to those who have plugs in their ears.]

But Martha herself seems determined to make her case a possibly high profile embarrassment for the Democrats - at least according to Matt Drudge. Drudge reports that Martha and her friends are spreading the word that the insider trading investigations are just a Republican persecution, even as the liberal, Democrat-aligned media - especially the New York Times - has led the charge against her.

It will be bad news for Democrats if Martha succeeds in recasting herself as a partisan Democrat figure, especially if she is then shown - even if only in the media, if not in a criminal case - to have engaged in insider trading. If Ms. Stewart is willing to strongly identify herself with Democrats and their causes, she can probably cause the public to see her in this light. That creates a significant downside risk for democrats. However, given the amount of circumstantial evidence accumulated against her, and especially given the way the liberal media - especially the New York Times - have presented that evidence to the public, it is hard to see how she can persuade the public she is the victim of Republican nastiness. So there seems to be little downside risk for Republicans.

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Senator Dorgan Enquires

Senator Dorgan wrote to Attorney General John Ashcroft to ask why there has been no indictment in the Enron case. Dorgan wrote:

"The Enron scandal was the corporate scandal first to be uncovered. Yet the investors, the employees and the American public have seen no action taken against those who were involved.''

A Justice Department spokesman replied that the Enron task force ``is working as fast as they can and as aggressively as they can," that the Enron investigation is extremely complex and that any prosecutions will be ``based solely on the evidence and the facts,'' rather than politicians' calls for action.

The reader is invited to decide for herself whether a fair translation of that reply is: THE JUSTICE DEPARTMENT DOES NOT BELIEVE IT CAN OBTAIN A CONVICTION OF ANY MAJOR ACTOR IN THE ENRON MATTER AT THIS POINT. The Man Without Qualities inclines to that interpretation.

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New News Is No News

Today the media, including Associated Press reports, say that "A key gauge of U.S. economic activity fell in July, a further sign of a shaky economic recovery as stock market gyrations affected consumer and business spending."

But the stock market was well up, especially the retail sector. How can this be?

Does it matter that the Conference Board, which issues the Leading Economic Indicators, seems sure that there will be no "double dip" recession and itself pointed out that "This month’s decline in the leading index was primarily caused by weak equity markets and lower consumer expectations."

That equity markets declined in July was already known and the fall in "consumer confidence" (a variable that may not even exist) was also already old news. All of which means that today's "news" about the Leading Economic Indicators was hardly news at all. The only hint of this in the media reports is the observation that "Leading Economic Indicators fell 0.4 percent ... . Analysts had expected a July decline of 0.5 percent." Which means that today's real news - that is, the new information relative to what was expected - was good news. But you wouldn't know that from the headlines or overall tone of the articles. No wonder the markets went up - although that increase is certainly not all attributable to the Conference Board.

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Sunday, August 18, 2002

TIME Out of Joint!

TIME is now offering as a scoop its report that ENRON had some rather close relations with federal energy regulators during the Clinton-Gore administration:

Documents obtained by TIME show the energy giant enjoyed much closer ties with Clinton Administration regulators than was generally known. Long before Cheney's task force met with Enron officials and included their ideas in Bush's energy plan, Clinton's energy team was doing much the same thing. Drafting a 1995 plan to help facilitate cash flow and credit for energy producers, it asked for Enron's input—and listened. The staff was directed to "rework the proposal to take into account the specific comments and suggestions you made," Clinton Deputy Energy Secretary Bill White wrote an Enron official. Clinton officials also made efforts to help Enron get business overseas.

The story should hardly be surprising. Could anybody reasonably think that a meaningful, realistic energy policy could be developed by any administration without private consultation with the main commercial actors in the field?

Previously, many in the liberal media and some Democrats leveled criticism at Vice President Cheney for speaking to energy company executives in private in the course of developing the Bush administration's energy policy. I suppose the new "scoop" from TIME may susprise those media critics and Democrats - who may think government policy is extracted from consulting a crystal ball and without need for frank, expert conversations.

Of course, the federal government is supposed to help American business on a non-partisan basis. Perhaps the real "scoop" here is the thought of anyone in the Clinton administration actually helping an American company more associated with Republicans than Democrats?


UPDATE: Rand Simberg wasn't surprised.

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Friday, August 16, 2002

On to 2004

Matt Miller writes:

Howard Dean ... is the little-known governor of Vermont who is running for president. From a recent conversation it’s clear he’s the only Democrat aspirant so far willing to discuss an agenda bold enough to challenge Bush. ... Dean, a physician, wants health coverage for every American. .. When you ask Dean how he’ll pay for this and his other priorities (like early childhood programs), he doesn’t hem or haw. “By getting rid of the president’s tax cut,” Dean says. Not freezing it, mind you — getting rid of it. All $1.7 trillion worth.

Actually, if the point is to have a balanced federal budget (which Dean seems to say he wants), universal health care and lots of government-funded "other priorities" like childhood programs, "getting rid of the president's tax cut" would hardly make a good sized downpayment. Direct deposit of most paychecks into the government till would be more like what would be needed. Has anyone reminded Mr.Dean that the standard of living in Sweden is now less than the standard of living in Mississippi? Or that the average Swede now does not live as well as the average African-American?

Mr. Miller seems to think Mr. Dean has a reasonable chance, at least of the Democrat nod. If so, that would give the nation a clear choice - and maybe at least break up some of the gridlock in Washington.

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Mr. Scowcroft Regrets

I don't understand why Brent Scowcroft's argument against invading Iraq is being taken seriously - if it really is. Here is an argument which depends on such choice pieces of drivel as : "Israel would have to expect to be the first casualty, as in 1991 when Saddam sought to bring Israel into the Gulf conflict." Mr. Scowcroft deposits this factoid even as Israel is pleading with the United States not to delay attacking Iraq!

Undeterred by the obvious inconsistency between Israel's long-established understanding of its own security interests, which he surely has long known, and his patronizing attitude towards those same interests ("Brent knows best!"), Mr. Scowcroft commits more howlers:

Possibly the most dire consequences would be the effect in the region. The shared view in the region is that Iraq is principally an obsession of the U.S. The obsession of the region, however, is the Israeli-Palestinian conflict. If we were seen to be turning our backs on that bitter conflict--which the region, rightly or wrongly, perceives to be clearly within our power to resolve--in order to go after Iraq, there would be an explosion of outrage against us. We would be seen as ignoring a key interest of the Muslim world in order to satisfy what is seen to be a narrow American interest.

The best that can be said for this paragraph is that it rejects the ersatz posturing found less than twenty lines above that Mr. Scowcroft is really looking out for Israel's interests more than Israel itself is looking out for those interests. Here, Mr. Scowcroft admits his argument just advances "a key interest of the Muslim world." But this article should bear a warning: "DICTATED BUT NOT READ."

Mr. Scowcroft is certainly entitled to craft arguments advancing what he sees as key interests of the Muslim world. But as a matter of historical fact, many of those "key interests" have of late been defined by current and recent Muslim leaders to be opposed to American interests - as Mr. Scowcroft admits ("in order to satisfy what is seen to be a narrow American interest"). For example, the utter and complete destruction of Israel is seen by most current Muslim leaders as "a key interest of the Muslim world" - and the preservation of Israel "is seen to be a narrow American interest." That is by no means the only example. So why does Mr. Scowcroft even think generally that the United States should not be seen as ignoring a key interest of the Muslim world in order to satisfy what is seen to be a narrow American interest?

In connection with the recent Afghan invasion, people sounding a lot like Mr. Scowcroft repeatedly warned of the risk of violent reaction in "the Arab street" to almost every American move. These arguments were utterly discredited in the fact. It is just impossible to take Mr. Scowcroft seriously where he again argues that "in order to go after Iraq, there would be an explosion of outrage against us" without demonstrating why this argument means more than did it's utterly discredited Afghan forefather.

Mr. Scowcroft's argument that Mr. Hussein will use whatever weapons of mass destruction it has if we invade ("Saddam would be likely to conclude he had nothing left to lose, leading him to unleash whatever weapons of mass destruction he possesses.") is all but frivolous. The United States can make clear that Mr. Hussein will not be personally, physically harmed unless he engages in what we consider unreasonable measures going forward, including unleashing weapons of mass destruction, genocidal acts and war crimes. One of the advantages of being a decent country like the United States with an honorable President like Mr. Bush is that promises of this sort will be taken seriously. That would give Mr. Hussein plenty "left to lose."

Perhaps most tellingly, one would think Mr. Scowcroft's complete resume would bear more attention. The Journal says: "Mr. Scowcroft, national security adviser under President Gerald Ford and George H.W. Bush, is founder and president of the Forum for International Policy." But the Journal should have written: "Mr. Scowcroft, national security adviser under President Gerald Ford and George H.W. Bush, was a key member of the White House team that decided not to depose Saddam Hussein and invade Baghdad during the Gulf War.

Identifying him that way might have made Mr. Scowcroft's bizarre Journal screed more understandable. Indeed, at least one book on the Gulf War says Mr. Scowcroft is "a workaholic with a bland exterior. His only passion is arms control, a subject he argues with "voice rising almost to a screech and his arms waving."

It is certainly interesting that the predictably absurd New York Times editorial exploiting Mr. Scowcroft's article, and the corresponding front page article (Why does the Times bother formally separating putative news and opinion now, anyway?) dwell much more on the fact that Mr. Scowcroft has presumed close personal relations within the GOP, especially with the President's father, and do not tarry over his incoherent argument. The Times editorial, for example, sweeps the substance of Mr. Scowcroft's argument under the rug with the wonderfully daffy: "Mr. Scowcroft and others are making abundantly clear that dealing with Iraq is a highly complicated matter that carries great potential to produce unintended and injurious consequences if handled rashly by Mr. Bush."

Did we need Mr. Scowcroft to show us that war is "a complicated matter", or that any serious issue in the Middle East is "a complicated matter"? Did we need Mr. Scowcroft to enlighten us that a war "carries great potential to produce unintended and injurious consequences if handled rashly?"

Or perhaps the Times or Mr. Scowcroft mean to argue that no such potential would exist if a war were handled rashly by someone other than Mr. Bush. The Times, at least, has believed and advanced stranger positions. For example, the Times front page article presents Kissinger as opposing an Iraq invasion. But OpinionJournal points out that "if you read on in the Times account, you'll find that Purdum and Tyler are not telling the truth about Kissinger, whom they quote as saying only that good planning for Iraq's postwar reconstruction is crucial--an assertion with which no reasonable person disagrees."


UPDATE: Now the Times says that Mr. Bush says that he is listening. That's good. It's good to listen. It's good for a President to listen. I just hope he's listening to things that make a lot more sense than what Mr. Scowcroft wrote in the Journal. For example, I hope the President is listening very carefully to the details of what will be involved in a logistical sense in mounting an invasion with little near-by support from Iraq's neighboring countries. Kuwait more than owes us one on that score.

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As TIME Goes By

Gee, I wonder if this means TIME will be taking more dictation of strange creative writing from ex-Clinton officials such as Sandy Berger.

Maybe Arthur Levitt will give an interview explaining that he sat Harvey Pitt down and explained and explained that those Enron financials were just NOT transparent, and something should be done about it by Mr. Pitt. The Clintonite could argue: "But did Mr. Pitt listen? No. And look what happended." Of course, sensible people would point out that Levitt can't say this without explaining why Levitt did nothing. But such considerations didn't stop Berger.

Surely TIME will have no trouble running that story. The story could end with a suggestion that these accounting investigations of AOL Time Warner are just the Bush Administration trying vindictively to get the company in reprisal for TIME's fearlessness in exposing that the Clinton Administration had told the incoming Bushies what to do to meet the bin Laden threat!

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Thursday, August 15, 2002

Not So Great Art

Composer Karlheinz Stockhausen was widely and strongly criticised when the media reported his response to a question about the September 11 attacks on the United States:

What happened there is - they all have to rearrange their brains now - is the greatest work of art ever. 'That characters can bring about in one act what we in music cannot dream of, that people practice madly for 10 year, completely, fanatically, for a concert and then die. That is the greatest work of art for the whole cosmos.

So what is one to make of this OpinionJournal report in regard to a museum display of Hitler's art:

Timothy Cahill suggested in his Aug. 4 review for the Albany Times Union that we add Hitler to "the list of the 20th century's great artists" for having "choreographed World War II and the Holocaust as a mad act of aesthetic will." Martin Knelman, in his Aug. 11 review for the Toronto Star, saw Hitler as a master at staging "a really big show--the kind that millionaire rock stars now routinely offer their fans."

Aren't these reviewers even more off base than OpinionJournal indicates?

Or are we supposed to accept that the offense of Mr. Stockhausen's comment lay vastly less in what he said than in when he said it?
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Lower Level

The Wall Street Journal reports:

Federal prosecutors are pressing ahead with their criminal investigation of Mr. Skilling and other top Enron officials, in recent weeks bringing in several lower-level executives to testify before a Houston grand jury. Mr. Skilling, a subject of the probe, potentially could face securities-fraud and perjury charges, lawyers familiar with the matter said.

Certainly some activity suggests more enthusiasm on the part of the prosecutors than no activity would. So the Man Without Qualities may have been premature is detecting despair in the Department of Justice. But while there can always be surprises, it seems unlikely that the main criminal charges of which Mr. Skilling might be charged can likely be proved with testimony of lower-level executives. Of course, it is always possible that the prosecutors may uncover some other crime that can be proved that way: Al Capone did not serve time for murder or bootlegging. And that could help them bring pressure on Mr. Skilling.

Despite some silly statements by the prosecutors (and some fawning media) following their disastrous "win" of the Andersen conviction that "momentum" would force upper-level suspects to turn, nothing of the sort is reported to have happened. Unless one of the upper level suspects begins to cooperate with the prosecutors, the focus on lower-level executives seems more suggestive of desperation than confidence on the prosecutors' part. And the prosecutors' willingness to allow the SEC civil investigation to become more active recently is also not a positive sign in a case of this type, where the Justice Department is attempting to impose pressure on the criminal suspects and should desire complete control, at least if there is serious hope of bringing criminal charges that will stick.

A "low level" focus is better than nothing, and even "low level" grand jury activity should deflect the inevitable election-inspired charges that the Bush administration is allowing the criminal investigation to lapse. But for that very reason, it's hard to make much of this activity. For while I have no doubt that the Department of Justice would love to prosecute at least some Enron officials, I have seen nothing that suggests that is possible at this time. But even if the Department of Justice has despaired of bringing criminal charges, they surely would have enough sense to kick up some dust in the weeks before an election. Such dust could be kicked in perfectly good faith just by calling lower-level executives to the grand jury to see what they have to say under oath, even if nothing much is expected to come of it.

Of course, the prosecutors could almost certainly indict every Enron officer and board member right now. Conviction could be a quite different and potentially quite embarrassing matter - as the Andersen case demonstrated.

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Wednesday, August 14, 2002

Isn't What the FERC Says Interesting?

The Federal Energy Regulatory Commission has issued its preliminary report on the notorious Enron trading practices. If the preliminary findings contained in the report hold up, the new California grand jury empaneled by the Justice Department to investigate those practices won't have much to do. Here are some excerts:


While the exact economic impact of the trading strategies is difficult to determine precisely, Staff concludes that these now infamous trading strategies have adversely affected the confidence of markets far beyond their dollar impact on spot prices. is highly unlikely that the impact of the Enron trading strategies on spot prices alone accounted for a substantial portion of Enron's total revenues from long-and short-term trades.

On "Load Shift"

By Enron's own admission, its use of this trading strategy was not very successful in that Enron was not able to move the price paid for congestion management because the bidding strategy of other entities had a counter-balancing effort. In any event, Enron may have received approximately more [sic] congestion revenues due to this trading strategy. Nevertheless, whether successful or not, "load shift" involves deliberately creating congestion on a transmission line to increase the value of Enron's transmission rights, and is clearly an attempt to manipulate prices.

On Exporting Power out of California

While it may be true that any individual company may have acted in an economically rational manner by exporting its power to a market with higher prices, collectively the large amount of exports contributed to the scarcity in California during 2000-2001.

On "Ricochet"

Entities routinely engage in trying to capture profits from price differences that exist between different time periods, e.g., purchasing power day-ahead and selling it in real time. The actual price in the real-time market can be higher or lower than the original price paid in the day-ahead market. Entities assume this arbitrage risk where others are unwilling to do so.

On "Fat Boy"

Enron's use of the "fat boy" trading strategy did not set the market-clearing price in the Cal ISO's real-time market.

On "Get Shorty"

In this trading strategy, Enron would commit to provide the ancillary services in the Cal PX's day-ahead market and then cover its position by purchasing those services in the Cal ISO's hour-ahead market. There is a legitimate profit motive here: to sell high in the day-ahead market and buy back at a lower price in the real-time market.

Staff notes that Cal ISO Tariff Amendment No. 4, which the Commission accepted for filing,103 permits the "buy back" of ancillary services as a legitimate form of arbitrage.

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Zombie Phone Home

WorldCom appears to have died long before its Chapter 11 filing. But its expiration was allegedly concealed by the black arts of accounting fraud applied to over Seven Billion Dollars in operating expenses. Through all that period of concealment, WorldCom's competitors - AT&T, Sprint and others - had to compete with the WorldCom zombie. WorldCom's banks say the company's accounting fraud allowed WorldCom to obtain billions of dollars in funds under its bank loans which should not otherwise been available, funds which WorldCom used as an operating subsidy. That is to say, the effects of WorldCom's fraud on its competitors has already been economically similar to - although not yet as damaging as - the effects of the decisions of Eastern Airlines' bankruptcy judge on competing airlines.

In some ways related to solvency considerations, the telecom industry resembles the airline industry. An interesting Wall Street Journal article today asserts:

Buyers have begun rescuing financially troubled fiber-optic telecommunications networks for cents on the dollar, but by giving these companies new life they risk perpetuating the world-wide capacity glut that sent the industry into a tailspin. ... [W]ith rescue efforts under way for a number of these troubled telecom providers, including the latest bankruptcy filer, WorldCom Inc., that capacity may be here to stay.

What's the solution? Well, Stephane Teral, identified in the Journal article as research director at telecom industry-tracker RHK of South San Francisco, California, is quoted as saying: "If you want to solve the problems with the telecom industry in North America, you better liquidate, period."

But if Ms. Teral or the authors of the Wall Street Journal article think that liquidating WorldCom is going to make excess capacity in any way disappear from the market, they are mistaken. [Actually, I don't think Ms. Teral is suggesting any such thing - although the Journal article presents her quote that way. Ms. Teral is probably suggesting that a liquidation would help solve the problems with the telecom industry without eliminating any real capacity. That is essentially the view advanced below.]

The real assets of WorldCom, Global Crossing and every other company that overbuilt telecom capacity will not be destroyed by a legal liquidation of any company. Liquidation will simply cause the sale of those real assets to some other person. That is what has happened to Global Crossing, whose capacity is still very much a part of the market. Industry assets and excess capacity simply exist as real, physical things, there is no good reason to destroy those assets or remove them from the market - and a legal and financial liquidation will certainly not have that effect.

Does that mean that a liquidation of WorldCom is ill advised or that WorldCom's competitors are doomed? The answer is probably "no" to both questions. Ms. Teral is probably right - but perhaps not for the reasons her quote is offered to support.

Worldcom may either be reorganized or liquidated. If WorldCom is the most efficient user of its own assets, then reorganization may be in order. But WorldCom's need to conceal huge operating losses over a period of years while its competitors did not have to do that strongly suggests that WorldCom is NOT the most efficient user of its own assets. Recent industry history therefore suggests that those assets would probably be better used by WorldCom's competitors, who should be allowed to purchase them in liquidation. The liquidation price for those assets would be low, so the purchase should be affordable. The capacity will not disappear, but much will remain unused and dark, probably for the next few years.

The Journal article suggests that WorldCom may emerge from bankruptcy as a fierce competitor:

As struggling companies are bailed out, and the massive debt they incurred to build their lines is wiped away, they "are in a much stronger position to compete on pricing," says To Chee Eng, a Singapore-based analyst with the U.S. market-research and consulting firm Gartner Inc. A revived WorldCom could be an especially nettlesome competitor for the likes of AT&T Corp. and Sprint Corp. Upstart companies such as Global Crossing or Williams still have to fight inch-by-inch to win the largest corporate customers. But WorldCom already has those relationships, and if it eventually slashes prices it will put the most direct pressure on big competitors such as Ma Bell.

But the capacity problem already exists - it is a problem of overabundant, real assets. WorldCom's competitors therefore probably don't have the choice of turning away from the market or this business. If WorldCom's only competitive advantage is financial, as suggested by Mr. Eng, then WorldCom's competitors will have to stay in the market, cut their prices and use their competitive advantages in operations to the extent possible - an advantage which has already been clearly demonstrated by their not having run up huge operating expenses they found necessary to conceal, unlike WorldCom. In the process, one or more of WorldCom's competitors may join it in bankruptcy. If so, once they are reorganized, WorldCom will have no advantage over them - it would be a battle of the zombies. WorldCom will probably simply be driven out of the business again, and require liquidation or further reorganization. In bankruptcy parlance, a WorldCom plan of reorganization based solely on the supposed financial advantage identified by Mr. Eng, and which does not correct the operating deficiencies which have driven WorldCom's losses, is almost certainly not feasible. Under the requirements of Chapter 11, no such plan of reorganization should be confirmed by a bankruptcy court.

But many such plans have been confirmed.

And worse could happen. If the WorldCom bankruptcy court were to adopt the "public service" approach to the case, WorldCom might function as a "reorganizing debtor" under Chapter 11 and court protection for a long time, all the while consuming its own assets the way Eastern Airlines did. That would tend to eliminate real capacity over time. But the effects of such an "elimination" on WorldCom's competitors would probably be even worse than those resulting from WorldCom's emerging from Chapter 11 as a reorganized, recapitalized zombie.

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Tuesday, August 13, 2002

Flying Zombies

In a competitive market with few competitors but excess capacity, one might expect that the bankruptcy of one competitor would lift the prospects of the survivors. But when US Air filed for Chapter 11 protection, its competitors' stock prices were savaged. Why?

The Times says:

[US Airways] took another step yesterday toward trimming its labor costs by presenting a proposal for concessions to the International Association of Machinists, which represents US Airways' 5,500 fleet service workers. The union, which also represents 6,800 mechanics at the carrier, said both of those groups of workers would vote on concessions before the end of the month. US Airways has already reached agreements with its pilots and flight attendants for concessions that would save about $550 million a year. By bringing down its costs, US Airways will put competitive pressure on other carriers to do the same and give them more leverage in negotiations with their unions, analysts said. Cutting back its capacity is likely to mean more revenue for competitors, nudging them toward profitability. And US Airways could lower its costs enough to make room to experiment with a simplified fare structure.

But if US Airways unions are willing to grant it concessions, isn't it reasonable to think other airlines will be able to obtain the same concessions? And these developments that the Times' analysts say will give other airlines "more leverage in negotiations with their unions" and "more revenue ... nudging them toward profitability" hardly seems the stuff of stock price savaging. Is the market that out of touch?

No. In fact, there are very serious historical reasons to view the US Airways bankruptcy as a potential disaster for competing airlines. Consider the bankruptcy of the old Eastern Airlines. As with many airlines bankruptcies, the Eastern Airlines bankruptcy court viewed the airline as a "public service" - a characterization which the court used to justify Eastern's consumption of virtually all of its cash, equipment and other assets. In the end, even the secured creditors and administrative creditors of Eastern Airlines received just a few pennies for each dollar of debt. In the case of the secured creditors, the court allowed the airline to so run down and cannibalize the equipment securing the debt that when the creditors were finally able to foreclose, the equipment was often worthless. The so-called "administrative creditors" were unsecured creditors who advanced credit to the airline (sometimes involuntarily) after the bankruptcy. Such creditors did poorly, but they beat out the general, unsecured creditors, who received absolutely nothing.

But as far as competing airlines are concerned, the real importance of the bankruptcy court's treatment of airline cases does not lie solely in the outrageous treatment of the airline's creditors. Rather, the problem for the competing airlines is that they have to compete against an airline which is empowered to exploit its creditors for an operating subsidy which the non-bankrupt airlines don't have unless they, too, declare bankruptcy. Competing with a bankrupt, zombie airline is very expensive. Eastern Airlines converted several billion dollars of its creditors' funds into operating subsidies with the blessing of its bankruptcy court.

But it gets worse. If the bankruptcy courts continue to advance their "public service" approach to airline bankruptcies, creditors of existing airlines must take into account not only the increased likelihood that their debtor will seek bankruptcy protection resulting from the need to compete with a zombie, but also the likelihood that the creditors will be subject to Eastern Airlines style gutting of creditors rights if such a bankruptcy occurs. That means the cost of credit to competing, non-bankrupt airlines will rise substantially - further increasing the risk of bankruptcy. This vicious cycle could easily expand without limit. With the current structure of the airline industry and its weakened condition, it is no exaggeration to say that the US Airways bankruptcy has the potential to destroy the entire worldwide airline industry if US bankruptcy courts insist on following precedents such as Eastern Airlines. And the policies of insolvency courts of other jurisdictions are generally worse than those of the US courts, further exacerbating the potential problem.

The best possible thing the US Airways bankruptcy court can do for the nation and the national airline business is to take a very hard look at US Airways viability - and utterly reject the ill-conceived "public service" model. If the US Airways plan of reorganization is not quickly produced and clearly shown to be viable, US Airways should be promptly liquidated.

But historically, that has not been the way bankruptcy courts have treated airline bankruptcies.

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Big Mo's Guide to St. Alban's (Columbine) Populism II

Whatever Al Gore did to tick off the nabobs at the New York Times, he did it in spades.

It's been almost a hit-a-day recently in the Times for poor ole Al.

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Would That Which We Call a Blog...?

UPDATE: Ann Salisbury comes up with some additional good thoughts.


The question of pseudonymous blogging comes up from time to time. Now, it is Steven Den Beste writing that "someone who pontificates anonymously is suspect."

Perhaps this is a variant on, or a corollary of, the old French adage: "He who is absent is guilty!" Regardless, one would hope that someone who pontificates is generally suspect, regardless of whether such pontification is issued under a given name or under an assumed name, as the Popes issue their pontifications.

Steven seems to have entered these considerations by way of a discussion with Demosthenes, who has his own reasons for pseudonymous blogging, reasons with which Steven does not agree. Those are not the reasons of the Man Without Qualities, as explored in what I believe was a rather thoughtful discussion with Charles Murtagh, Derek Lowe and "Max Power" - but not referenced by Steven. I am generally sympathetic to many of Steven's musings. But I think that the context in which this dispute arose seems to have caused some confusion between arguments applicable to what weight one should give to what a particular blogger writes and arguments applicable to the issue of whether pseudonymous blogging is somehow improper.

I, personally, do not invite my readers to assume my writings have extra validity because of the way I apply them in my life – which I keep almost a complete cipher. The focus here is on the ideas and their formulation ("you do not write poems with ideas, you write them with words") – not on any credential I may have by way of education or experience or success. The Man Without Qualities is, as far as his reader knows, without those Qualities – perhaps without a single one of the Four Qualities some deem prerequisites for avoiding condemnation as “worthless drivel” not worth reading.

Other than that, I don't have much to add now that wasn't aired when Charles previously raised the issue - except that I tend to the rather catholic view recently summarized nicely by InstaPundit.

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O, Glenn, You Say the Sweetest Things!

Instapundit asks:

Is Atrios really Bob Shrum? Is Robert Musil really Alan Greenspan? (Almost certainly not, in both cases, but the fun doesn't end there....)

Now, HUSH, Glenn, you naughty, naughty man!
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Isn't That Interesting

Paul Krugman writes that "Enron executives may have deluded and defrauded their shareholders without actually breaking the law."

It is by no means clear what Mr. Krugman meant when he created this mysterious glyph. But whatever else is intended, it is relatively clear that 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? But we have no Rosetta Stone for his glyph, because even though his discovery appears momentous, 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.

Readers of the Man Without Qualities may consider the remainder of Mr. Krugman's column for themselves, and ponder how it is that a putative economist seems to want his readers to conclude that the big current problem with the American economy is the widespread failure to expense options, even though the expensing of options would disgorge no new information into the markets. For example, Mr. Krugman notes: Byron Wien of Morgan Stanley recently told a group of security analysts that "stock options malevolence" is at the root of corporate scandal, and that "anyone who says that stock options aren't an expense destroys his credibility on all other issues."

I will pass over Mr. Krugman's preposterous suggestion that Cisco's stock performance is somehow attributable to a subtle, unidentified accounting fraud that isn't, but should be, illegal. Cisco's real offense in Mr. Krugman's mind seems to be adding credibility to George Bush's Waco economic forum - which by Mr. Krugman's rules more than warrants a suggestion of fraud. But I did I enjoy the sentence "What Cisco did was definitely legal" brutally inserted onto the end of the accusing paragraph, a sentence stylistically and substantively inconsistent with the rest of the paragraph, as if it had been penned and demanded by some alarmed libel lawyer. And it may be worth noting that by Mr. Krugman's lights, it appears that Salon, the on-line liberal singspiel, must also be the product of some fraud substantially more virulent than whatever it is Mr. Krugman wants his readers to believe ails the still-$100-Billion-Cisco.

It is not an accident that my discussion above does not say that "Mr. Krugman believes" anything at all, only that he appears to want his readers to believe various things: things a serious economist would have serious trouble accepting. In fact, Mr. Krugman's entire column is a fascinating exercise in watching a writer advance proposals to his readers from which the writer simultaneously distances himself. So it is also not an accident that Mr. Krugman quotes the unknown Mr. Wien - who the heck is he, anyway? - rather than reveal Mr. Krugman's own beliefs on this matter.

In the mean time, for example, Intel refuses for the present to expense its options. Nevertheless, my guess is that the genius Andy Grove retains more than a little "credibility" in the business world - regardless of whether Intel eventually expenses its options. Credibility like Mr. Grove's tends to happen and hang around when one makes tens of billions of real dollars for one's investors over a period of many years, even if one doesn't expense one's options. In Silicon Valley they might consider calling that "stickiness," now that the other trendy use for that term is no longer in favor.


UPDATE: Hoystory and MinuteMan and Caruso have interesting things to say about this Krugman effort. However, I don't agree with much of Hoystory's approach (how could anyone think Mr. Krugman’s "real goal" might be "correcting the problem" rather than attacking the President by whatever means available?). Further, if the Justice department were preparing to bring criminal charges, would the SEC be allowing it's civil team to go into high gear in the same area with no mention of coordination with the Justice Department - potentially disrupting the more serious criminal case? The new activity of the SEC in the Enron case that Hoystory notes is more suggestive of despair at Justice, with a corresponding willingness to let the SEC do what it can on the easier civil front. Such Justice Department desperation would also be consistent with the Justice Department convening another, California, grand jury to investigate Enron trading activities many economists say actually increased the efficiency of the energy markets.

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Wednesday, August 07, 2002

Closer and Closer to the Iger Sanction

And still closer ...
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FURTHER UPDATE: Newsmax continues to have TIME by the tail on this one.

Link via Croooow Blog.


Kenneth Adelman says in his Fox News article that the recent TIME anti-Bush hatchet piece was a carefully crafted piece of Clinton spin that TIME bit and swallowed whole:

"Listening to Clinton on Iraq now impresses. Learning what Clinton did on Iraq then depresses."

UPDATE: Newsmax:

Flatly contradicting Time magazine's claims this week that his administration turned over workable plans to capture or kill Osama bin Laden to the Bush White House, ex-President Clinton confessed earlier this year that his administration's plans had a "high probability" of failure. Clinton made the stunning admission during a February address to a New York business group, which, apparently, Time declined to cover.

And the've got the audio to prove it. Mullings also helps show Mr. Berger for what he is.

Links via Croooow Blog

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African American Republicans

From the 1860's through the New Deal, African-Americans were pretty Republican - with the big divergence coming only in the 1960's. There is a growing number or reports that the traditional values of African-Americans - which harmonize with such GOP priorities as building the business/middle class and supporting school vouchers, welfare reform and strong family values - are leading more back to the Republican Party.

It's interesting that the linked report above comes from Milwaukee, where the school-choice through vouchers issue has been so prominent, and the voucher program so successful.

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Big Mo's Guide to St. Alban's (Columbine) Populism

Sheesh. Maureen ("Big Mo)" Dowd writes about Al Gore (bullet points):

... old sport ... your favorite fat cats ... sit on their checkbooks ... no one wants you to run again ... grim night... you are not popular .... Without ... Big Money, you'll have to rely on the support of Big Labor and Big Media ... you have to know the right people ... an angry manifesto ... Wave the Cross of Gold at the golden ... You have worked so hard to cultivate media bigwigs, with extended meals and endless calls tattling on your rivals... aristocracy of the mind. ... Average Americans ... don't have the brains to read a butterfly ballot ... you are entitled to save people from themselves ... hedge, straddle, fib ... Your political birthright, your Ivy schooling, your upbringing in the corridors of power certainly entitle you to govern. If you need to pretend that the people are sovereign in order to become sovereign ... you are one of the entitled, then you are entitled to knock entitlement ... Andover Guide to Populism ... When political dynasties are in trouble, patrician leaders must hobnob with hoi polloi, like rescued miners and unemployed factory workers ... The problem with Knowing It All, dear boy, is that some of the little people may find you insufferable ... hold their hands over their little, average American ears ... Cling to your faux populist fury ... you are entitled to always be right ... proclaim you are retreating, like Scarlett, to draw strength from the red dirt of Carthage ... Do not mention that you are really holed up in a Washington suburb writing a book ... Do not talk about being the vice chairman of an L.A. financial services company.... you are entitled to any money you can get ... If you want to get bailed out in bidness, cash in on your famous name.... Hillary and Bill kowtow to the party's pro-business moderates... Putting Gore First is a way of Putting People First ... And if you are one of the entitled, you are entitled to be first.

Once, I read a story about a man who shot and killed his entire family. Shocked, I asked the person I was with whatever could make someone do something like that. He thought for a moment and responded: "They must have annoyed him."

Guess so. The way Al Gore must have annoyed Big Mo.


UPDATE: And just imagine the savage frenzy destined to overetake Big Mo when she finds out that Mr. Gore tried to get free Springsteen concert tckets - AND FAILED! And then the Springsteen people TALKED about it!


FURTHER UPDATE: After the initial softening up of the Gore position with directed artillery from Big Mo, the Times now rolls out the front page troop transport: "Wounded Party?"

What's next? Oprah weeping on the air over the tragedy that has befallen - nay, that has become - the Democrats at the hands of Al Gore?
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It seems that there are serious Australian physicists who believe that either the charge of a single electron varies over time (which would invalidate the present formulation of the second law of thermodynamics) or the speed of light varies over time (invalidating the long accepted assumption that its speed is constant). Forced to choose between invalidating the second law of thermodynamics or accepting a varying speed of light, the scientists suspect that it is more likely that the speed of light is inconstant.

Paul Davies of Sydney's Macquarie University, says: "When one of the cornerstones of physics collapses, it's not obvious what you hang onto and what you discard."

That last part certainly makes sense.

Davies says that accepting variations in the speed of light "means giving up the theory of relativity and E=mc squared and all that sort of stuff. ...But two of the cherished laws of the universe are the law that electron charge shall not change and that the speed of light shall not change, so whichever way you look at it we're in trouble."

Davies also says that the reevaluation is based on new observations indicating that the structure of atoms emitting quasar light was slightly but significantly different from the structure of atoms in humans. The discrepancy implies that either the electron charge or the speed of light has changed over time.

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Tuesday, August 06, 2002

The Quick and the Should-Be-Dead

And - as a special bonus - the Yale Pundits hilariously demolish Helen Thomas on the same topic!

UPDATE: Kevin Holtsberry brings a lot of worthwhile thoughts to the table.

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