Man Without Qualities

Thursday, July 04, 2002

Ding Dong, The Witch Is Dead?

Independence Day 2002 is fast coming to a close over all of America, and there are no reports that a new bin Laden video has been released.

According to the Mirror, the Arabic Sahab website that issues daily information on the war in Afghanistan earlier announced that the al-Qaeda leader would deliver a hate-filled video today, Independence Day. There was no report that al-Qaeda denied the announcement.

But here we are, and no tape.

So maybe, just maybe, he's with his 67 virgins (or raisins). One can only hope he got what he deserves.

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Marthahate To Your Door

The New York Times seems to prefer its Marthahate sushi style: fishy, raw and served with vinegar but without a containing vessel.

The point of today's morsel at first seems to be to report that big trouble is looming at Martha Stewart Living Omnimedia because (1) Ms. Stewart's image problems will likely cause shoppers to stop buying the company's goods and advertisers to cut back on buys in the company's media outlets, and (2) "as her troubles have mounted, more damage control specialists have been hired" - and they're not cheap. Also implied is that people will stop buying her media products as her "wholesome" image deteriorates.

But, wait! Are people really likely to stop buying Martha Stewart products? After first raising the alarm, the Times says it's just "not clear." But the only expert cited says the opposite is clear:

"At the end of the day, the Kmart shopper listens to Martha Stewart about subjects like design and homemaking," said Clive Chajet, a corporate identity consultant in New York. "They do not listen to her ideas about financial investments."

How about advertisers? Are they backing off? Seems not: "Advertising executives have said they see little change in demand for ads in Ms. Stewart's magazines and on her television shows." The Times again expresses anxiety: "But as the controversy swirls on, that may change." However, absolutely no support is provided for the assertion "that may change."

What about the extra professional expenses? The Times says: "A spokesman for the company would not say whether Ms. Stewart or the company was paying for their counsel." So the Times has nothing to report on that front - which doesn't stop them, of course.

The Times also says it sees the likelihood of other punishing expenses: "And if the company's expenses rise as a result of having to refocus the public's attention on the Martha Stewart brand, that will eat into the expected profits as well." But since the Times comes up with no evidence that a deterioration in Ms. Stewart's image will affect the sales or revenues of her media outlets or products, there is no looming need for the company to "refocus the public's attention." It's just another Times red herring.

Just what does the Times know? Well, we are urgently told that Ms. Stewart is still being paid her salary! There's also some random material that seems to be extracted uncredited from the company's public securities filings: the company pays her well for the use of her various homes as photo shoots sites, for example. Is that a surprise to the Times? Have the Times reporters ever looked at Martha Stewart Living Magazine - which largely consists of photos of her homes? (Also, if the Times' innuendo that Ms. Stewart is being overpaid for the use of those homes by her company is correct, then using other homes for future shoots would presumably help offset whatever additional expenses the company might incur to "refocus the public's attention," right?)

Why would the Times run this particular wretched scrap of an article?

Well, could the Times savaging Martha Stewart be related to the fact that big parts of the New York Times seem to directly compete with various Martha Stewart enterprises? For example, the Times runs lots of articles on food and shelter and life style - and the Times seems to go for the same market as Martha does in those respects. Today, for example, right next to the Times "Business Day" section containing the attack on Ms. Stewart's interests, there is an entire section titled "Home & House" that could almost be lifted from the pages of Martha Stewart Living Magazine, complete with a lucious, full-color spread on the wonders of screened-in porches. Other Marthaesque "good things" follow

Further, the kind of mostly unsupported anxieties the Times is stirring up in this article closely resemble those stirred up by so-called "short sellers" trying to manipulate the price of a stock, in this case Martha Stewart Living Omnimedia stock. In fact, the Times article seems to be positively begging investors to trash Martha Stewart Living Omnimedia stock, readers to stop reading her magazines, shoppers to stop buying her products and advertisers to stop advertising in her outlets. After all, people could read and advertise in the Times instead! Why, investors interested in individual-dominated public media companies can even buy Times stock instead of Martha Stewart Living Omnimedia stock!

As the Times puts it:

"It is a busy time of year, when magazine issues are being prepared for publication and holiday offerings are also being photographed for the catalog and the Internet."

Yes, and they do seem to be busy, busy, busy at the Times Business Day section - perhaps developing those valued synergies with the Home & House section. How modern!

In other words, is the Times being unethical - even crooked - with this article?

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Never Give a Sucker an Even Break! VI

The New York Times reports today that:

In an interview published Thursday in the weekly Le Point but conducted June 5, the boyish-looking former chairman [of Vivendi, Jean-Marie Messier] said Charles Bronfman, uncle of Vivendi board member Edgar Bronfman Jr., used ``bootlegger methods'' to take revenge. ``His dream is to replace me by an American and regain control of the group.''

Which is interesting, since Mr. Messier seems to express his beliefs that the Bronfmans:

(1) had the power to "take revenge" on him, where they now own only 5.2% of Vivendi (they have sold some of their stake),

(2) want an American to run Vivendi, where Mr. Messier seems to be using the term "American" in its broadest sense, to include Canadians; and

(3) want to "regain" control of the Vivendi group, where the Bronfmans never controlled Vivendi.

Perhaps this example of Mr. Messier's thought processes gives some indication as to why his strategic plans went so awry.

Jean-René Fourtou, the newly appointed Vivendi interim chairman and chief executive, is not an American and his appointment does not seem to reflect the desires of the Bronfman family or any shift toward their control of the group. So an investor might wonder whether there is more "revenge" in store.

Mr. Messier's crack about the Bronfmans and "bootleggers" is interesting. It is true that the Bronfman fortune got a big boost selling liquor during prohibition. But the family is Canadian, and liquor was not illegal in Canada during prohibition. So I'm not really sure if it's right to suggest that the Bronfman family were bootleggers or that Charles Bronfman retains bootlegger characteristics.

But, since Mr. Messier brings it up, Charles may want at least to consider having Edgar Bronfman, Jr.'s legs broken - just for getting the family into this mess and, of course, for old times sake. I would.

The Times also reports that:

The appointment of Jean-Rene Fourtou as chairman prompted an optimistic initial reaction of the Paris exchange: Vivendi shares opened 15 percent higher. But they slipped back as investors realized how much work needs to be done to turn the company around, and closed 5.5 percent higher.

Dow Jones reports that the Vivendi share price uptick was attributed to sign that Vivendi's banks would extend additional credit, notwithstanding the internal chaos of their borrower. The appointment of some French bank officers to the Vivendi board was seen as good news: "Although the directors are appointed in an independent capacity, bankers in Paris said their presence on the board should 'help grease the wheels' between the troubled media group and its creditors."

Of course, in the United States such appointments might be thought to create a horrifying conflict of interest for these directors who, after all, are apparently going to be greasing the wheels with government-insured bank funds. And bank shareholders might be forgiven a certain queasiness at the prospect that these bank officers have been given Vivendi board appointment with the express intent to "help grease the wheels" between the troubled media group and the bank to which the directors supposedly owe a fiduciary responsibility.

And then there is the interesting report that the banks' support comes with analysts' expectations that "bankers are now likely to give credit on condition of asset sales." Apparently political considerations will prohibit substantial sales of Vivendi's French assets, including Vivendi's loss-making pay-TV unit Canal Plus. Although some people have suggested that part or all of Canal Plus could be sold, its chief executive, Xavier Couture, said in an interview published Thursday that ``whatever happens, the Canal Plus group is there to stay as an entity.'' Further, it's hard to see how Canal Plus can be sold because it pays half the funding for movies made in France. So it seems that for "cultural considerations" Vivendi is going to have to sell off its best performing (American) assets, and retain the dud French assets - all the while absorbing more credit from French banks.

Maybe that shareholder queasiness and those 'cultural considerations" help to explain why Dow Jones is also reporting that "Despite the assurances, shares in Societe Generale and BNP Paribas SA - Vivendi's two largest lenders - have dropped sharply this week."

Yes, indeed. As well they might. The Wall Street Journal says that "[b]ased on a detailed liquidity statement Vivendi released late Wednesday, credit analysts estimate that Vivendi could face a cash shortfall of €2.7 billion ($2.65 billion) by the end of the year, expanding to as much as €5.5 billion by the middle of 2003, unless it can quickly secure a new multibillion-euro credit line from its lenders." And the banks are now expected to provide those funds.

And if the Bronfmans and Mr. Diller can patch up their differences and wait out the lunatics in Paris, maybe the Canadians and Americans will have a good shot at picking up the American assets at a bargain, firesale price after all - with French taxpayers paying the difference.

Got to love those European “cultural considerations.”

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Independence Day and A Problem With International Law

Today is Independence Day, and the Man Without Qualities hopes this post will mostly be read tomorrow by people having a good time at a picnic this afternoon and watching fireworks tonight!

It also seems an appropriate day to consider some principles which events of this day not really so many years ago helped to establish. One very odd aspect of international law is its failure to incorporate some basic eighteenth century political insights. For example, political thinkers of the eighteenth century (including the signers of the Declaration) recognized the universal principle that the only source of governmental legitimacy is the consent of the governed. And "consent of the governed" means frequent, free and fair elections - not some dictator telling the world that if an election were held he would win. And "consent of the governed" doesn't mean some dictator or oligarchy explaining that their country is not "ready" for full electoral democracy. These are universal democratic principles, not details subject to ad hoc consideration on the basis of cultural relativism. There is room, however, for various uneasy "virtual representation" theories which disenfranchise some classes of people (children, criminals and others), and for significant constitutional variations.

But most forms of international law continue to inhabit some pre-Enlightenment sphere in which even a simple dictatorship can claim to be the legitimate government of a nation with rights to defend itself and the nation. This form of international law dominates the United Nations. And it is completely anacronistic and wrong.

One consequence of these universal principles - a consequence which is not openly vetted in what E.B. White called the little green glass shee-bang on the East River - is that all governments that do not conform to such principles are illegitimate.

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Wednesday, July 03, 2002

Never Give a Sucker an Even Break! V

The Vivendi board did indeed appoint Jean-René Fourtou as interim chairman and chief executive today, replacing Jean-Marie Messier, who resigned. Mr. Fourtou is not reported to have any experience guiding companies in crisis, nor is he said to know even a dollop about entertainment companies. But he is French – which is what the board is said to really care about. Vivendi may sense a certain vacuum in his background, since somebody seems to have induced Reuters to call Mr. Fourtou a "restructuring expert" - although his restructuring experience appears confined to reshaping what had been a big sluggish, state-owned drug company, Rhone-Poulenc. He led Rhone-Poulenc through privatisation into a merger with Hoechst to create Aventis. But neither Rhone-Poulenc nor Aventis ever faced a liquidity crisis or the collapse of its basic business plan.

Perhaps just to show what nice guys they are, the Vivendi board is also irrelevantly accreting to itself Claude Bébéar, the chairman of the French insurance giant Axa, and Gerard Kleisterlee, the chief executive of Royal Philips Electronics, the Dutch consumer electronics company that owns a 3.25 percent stake in Vivendi.

Reports are that Mr. Fourtou, the vice chairman of the supervisory committee at Aventis, the French-based pharmaceutical company, has been friends for three decades with Mr. Bébéar! So at least Mr. Fourtou won't be lonely - which would just be terrible, since he's already going to be running a business he knows nothing about and which has descended into near-chaos.

Investors appeared to signal their confidence in the Vivendi board actions by removing about another 22% of the Vivendi stock price today.

The Bronfman family stake in Vivendi is valued at about $1 Billion (down from $3 Billion this year). So today alone the family lost something like $220 Million dollars. Who's counting?

Hey, pretty soon they'll be talking real money!

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Tuesday, July 02, 2002

Never Give a Sucker an Even Break! IV

Amazingly, even the New York Times is now beginning to understand the dimensions of what is happening to the incredible shrinking Bronfman family fortune.
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Savaging Martha III

Some progress seems to have been made in the government's gross mishandling of the Martha Stewart case. The Associated Press reports:

Ken Johnson, spokesman for the House Energy and Commerce Committee, which is investigating the ImClone case, did not return phone calls from The Associated Press Tuesday.

Finally! God, I wonder what it took to get him to pipe down?


Shares of Martha Stewart Living Omnimedia were up more than 9 percent, or $1.10, closing at $12.60 on the New York Stock Exchange.
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Never Give a Sucker an Even Break! III

As if on cue, the New York Times now reports that "the eyes of Hollywood insiders are on a man they love to watch: Barry Diller." [People anywhere love to "watch" Barry Diller? Even after they've seen what he looks like? Would "keep track of" have been a better choice of wording?]

But, wait, Mr. Diller isn't on that list of Frenchmen who are being considered by the Vivendi board as replacements for Mr. Messier.

Worse, the Times has no problem at all reporting the unresolved inconsistency that:

"[W]ith Mr. Messier gone, Mr. Diller is likely to be a partner once again with Edgar Bronfman Jr., who ... many people in the industry believe will be forced to again play a larger role;"

But ...

"[F]riends and colleagues of both men say that the relationship between them is strained ... and Mr. Diller is unlikely to be willing to work for Mr. Bronfman."

And let's not forget that "many at Universal Pictures and the Universal Music Group were displeased at the notion of Mr. Bronfman's regaining influence over the units.

To sum things up simply: The dominant faction of the Vivendi board is deeply uncomfortable with any increase in American or Canadian influence in the company. But Barry Diller is thought to be about to more or less take over. The American Mr. Diller needs to do that together with the Canadian Edgar Bronfman Jr., who will be "forced" to assume a larger role. Except that Diller won't work for Mr. Bronfman and many at Universal Pictures and the Universal Music Group - the supposed American "crown jewels" of Vivendi, which the board may think are actually just "expensive baubles" - are displeased at Mr. Bronfman's regaining influence.

Well, I'm glad they cleared that up.

Interesting times. Very interesting times, indeed. And very expensive times for the shareholders, too, in all likelihood.
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Al Gore: Stand Up Comic! (bis)

Mickey Kaus finds yet more evidence that the WorldCom accounting funny business started in those golden, olden, laugh-filled Clinton Gore years.

Al! Go for all the laughs you can get! Don't let those pollsters and strategists hold you back! Let 'er rip!

First Pat Paulson. Now Al Gore. Standup comedy rules! The White House will host the Friars yet!
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Options IV

More Than Zero posts an excellent and interesting response to some comments that appeared here regarding a Jane Galt executive options post and a More Than Zero proposal.

More Than Zero also cites to a superb Wall Street Journal article by Henry Manne elaborating on the link between the current scandals and the suppression in the market for corporate control. More Than Zero also notes the disgraceful anti-Semitic overtones of that suppression.
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Never Give a Sucker an Even Break! II

Those Vivendi investors seem to have come to their senses and trashed the stock by about 22% in the past 24 hours, and Vivendi's credit rating was cut to "junk bond" status by Moody's Investors Service on concerns about its ability to pay off 3.5 billion euros ($3.4 billion) in debt coming due in the next 12 months.

Let's see, how much of a loss does that mean the Bronfman clan's Hollywood Wunderkind has inflicted on them today? Well, they can take comfort in the facts that today's loss is small potatoes compared to what will happen to the stock price if Vivendi misses that debt payment, and DuPont stock declined about 1% today, too. So there.

Perhaps the Vivendi investors and Moody's are catching on to the likelihood that the future of Vivendi bears an ever closer resemblance to the future of, say, Yugoslavia, circa 1990!

For example, the "favored candidate" to head Vivendi is Jean-René Fourtou, the vice chairman of the board of the French-German pharmaceutical giant Aventis. But the New York Times genteelly reports that a person close to the Vivendi board said "not all of Vivendi directors have yet approved Mr. Fourtou's appointment." Which one can understand, since appointment to that position of a drug company executive with no reported experience in managing companies in crisis or entertainment companies appears to be nuts. He is reported to be favored by the French directors, apparently because he is French. So very French.

The Times also drolly notes that "Other possible contenders include Marc Vienot, honorary chairman of Société Générale, and Charles De Croisset, chairman of Crédit Commercial de France, part of HSBC." Notably lacking in the Times coverage is any indication that the Bronfman family is not prepared to ambush any of these candidates the same way they just "got" Mr. Messier. The amazing focus on the nationality of the new chairman seems to be leading to a kind of corporate "ethnic cleansing."

There is also the exquisitely loopy report that what finally did Mr. Messier in was his actually taking some effective action to address the credit crisis. As the Times puts it:

Vivendi's shares continued to plunge even after the company sold a stake last week in Vivendi Environnement. That move might normally have been seen positively by investors since it raised money to pay down debt. But the stake sale alarmed some of the French directors, who saw it as an impetuous move on Mr. Messier's part that undermined their support, a person close to the board said.

That should certainly concentrate the minds of investors as they realize that (i) Vivendi probably must sell assets to make its debt payments or it will go bankrupt, (ii) Vivendi's best assets are in the United States, but (ii) the French directors on the board were so alarmed by the sale of some underperforming French assets that they withdrew support for Mr. Messier.

As people have been saying a lot recently in other contexts: "It's not that hard to connect the dots."

Too bad that once the dots are all connected the picture looks a lot like a noose around a Bronfman neck.

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Monday, July 01, 2002

The Pledge

The uproar following the opinion of the Ninth Circuit United States Court of Appeals banning the "Pledge of Allegiance" in public schools has not been completely cogent.

The Man Without Qualities has never thought that the phrase "under God" was inserted in the Pledge as a prayer, and the Ninth Circuit seems to have seriously misunderstood that.

That is, just as the Pledge's word "indivisible" refers to the complex of principles established by the Civil War, the phrase "under God" properly refers to the historical fact noted in a prior post that while it is not necessary to base a theory of the "natural law" or "fundamental rights" that secure "liberty and justice for all" on the existence of God – it is possible to do so - and the United States Constitution is a product of exactly that approach. The first Amendment does not require that secular acknowledgements of the influence of religion on the United States be ignored or denied in public life or school - they are obvious and everywhere. The "logic" of the Ninth Circuit decision would lead to elimination of all references in history books that the Pilgrims were Christian, religious refugees (and, as others have already noted, to banning the Declaration of Independence, which refers to the "Creator") . As noted here previously, those who suggest that the Constitution is in any meaningful sense "Godless" are seriously, perhaps wilfully, misreading history:

[T]he structure of the Jefferson-Madison approach to individual liberties depended on the existence of "natural rights of man" (including religious rights) that God created and included in a divine plan which legislatures were prohibited by God from modifying. That is, in the Jefferson-Madison approach, the Bill of Rights and natural rights generally reflect the plan of a universal God. It's not that hard to locate plentiful evidence of this. For example, Madison drafted the Bill of Rights, and he had previously written his "Memorial and Remonstrance" in 1785, which opposed a bill in the General Assembly of Virginia to impose a tax to support Christian teachers. That bill was defeated and in 1786 the legislature instead enacted Jefferson's "Virginia Act for Establishing Religious Liberty." Jefferson’s bill is in many ways the precursor to the First Amendment. It reads in part:

"Well aware that Almighty God hath created the mind free; that all attempts to influence it by temporal punishments or burdens, or by civil incapacitations ... are a departure from the plan of the Holy Author of our religion ... that our civil rights have no dependence on our religious opinions, more than our opinions in physics or geometry; that, therefore, the proscribing any citizen as unworthy the public confidence by laying upon him an incapacity of being called to the offices of trust and emolument, unless he profess or renounce this or that religious opinion, is depriving him injuriously of those privileges and advantages to which in common with his fellow citizens he has a natural right...

"Be it therefore enacted ... That no man shall be compelled to frequent or support any religious worship, place, or ministry whatsoever, nor shall be enforced, restrained, molested, or burdened in his body or goods, nor shall otherwise suffer on account of his religious opinions or belief; but that all men shall be free to profess, and by argument to maintain, their opinions in matters of religion, and that the same shall in nowise diminish, enlarge, or affect their civil capacities."

"And though we well know this Assembly, elected by the people for the ordinary purposes of legislation only, have no powers equal to our own and that therefore to declare this act irrevocable would be of no effect in law, yet we are free to declare, and do declare, that the rights hereby asserted are of the natural rights of mankind, and that if any act shall be hereafter passed to repeal the present or to narrow its operation, such act will be an infringement of natural right."

We are to believe that this Bill reflects the theory - and its authors are the men – that supposedly eliminated God from the Constitution through their Bill of Rights? The reader may decide for herself.

Madison and Jefferson WERE opposed to the idea that the United States was founded on Christianity. Madison's "Memorial and Remonstrance" is very specific about that. It is also worth noting that Jefferson was not a Christian, although he regarded Christ as a sublime philosopher. But, then, so did Mohammed.

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Getting Priorities Straight

A little over a year ago Vermont Senator James Jeffords bolted from the Republican Party, he said in large measure because he felt the GOP's funding priorities just weren't right.

Perhaps one can see what Mr. Jeffords meant by that from this report:

A Vermont historical preservation officer argues that 10,000 barns in the state need repair and that Mr. Jeffords is using that as an excuse to fight for $25 million in funding for the National Historic Barn Preservation Act. Citizens Against Government Waste (CAGW), for one, is "booing" Mr. Jeffords for having slipped authorization for the barn-renovation proposal into the recently passed farm bill. "In a nutshell, this is what is wrong with the leadership in the Senate," says CAGW President Tom Schatz. "Here we are at war, in an economic malaise and facing deficits, and Senator Jeffords wants millions of dollars to spruce up old barns. Could this politician be any more detached from the nation's priorities?"

Gee. Let's think about what other things could be done with TWENTY FIVE MILLION DOLLARS besides paying for private barn repair!
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Never Give a Sucker an Even Break!

How easy is it to summon up sympathy for a billionaire?

Found a little?

How about a billionaire playboy who is given control of the family financial empire, which had succeeded in acquiring about a one-quarter interest in the world's premier chemical and industrial company, but sold it to acquire what eventually became a big interest in a weird French Water-TV-Studio-Music company mess?

Would it matter if the two year stock price chart of the French Water-TV-Studio-Music company mess ("V") tracked against E.I. Du Pont De Nemours & Co (DuPont) ("DD") and the S&P Index looked like this? Or if the five year chart looked like this?

The DuPont stock was worth $8.8 billion when Seagram sold it in 1995 to pay for its $5.7 billion purchase of Universal, but had increased a bit to about $9 billion in value in 1998. The Bronfmans became the largest shareholders in Vivendi by selling the Seagram Company and its Universal media properties for $34 billion in Vivendi stock in 2000

The Man Without Qualities has previously noted that every few years somebody "sells the studio" or "purports to sell the studio" to some happy, stupid, deep pocket from beyond Interstate 5 or the Pacific surf.

It could be a soft drink company from Atlanta.

It could be a Japanese consumer electronics company.

It could be a crooked Italian businessman backed by an even more crooked French bank.

It could be a billionaire playboy who is given control of the family financial empire and who likes to write songs.

Or it could be a French water company!

But, somehow, it just doesn't usually turn out all that well for outsiders who buy Los Angeles entertainment companies.

Viacom seems to be something of a counterexample for the moment. But, then, Vivendi seemed something of a counterexample for a moment ago.

One way or the other, one can be fairly sure that there will be some very serious conversations back in Toronto pretty soon.

UPDATE: Vivendi's share price soared 10% on reports that its current chairman is resigning. Investors seem happy with that.

On the other hand, one has to wonder about those investors, since they celebrated while "Vivendi directors have reportedly proposed Jean-Rene Fourtou, vice chairman of drugmaker Aventis, as his replacement."

Vice chairman of a drugmaker? They'll love that in Hollywood. Boy, will they love that in Hollywood.

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Martha v. Big Mo

Charles Murtagh points out an unexpected consequence of a successful prosecution of Martha Stewart for insider trading: Trouble for Maureen ("Big Mo") Dowd!

But Charles is wrong, of course. He's thinking like a good scientist. Logic, consistency, coherency. Charles thinks that if Big Mo is exposed as seriously lacking in these features, she will be embarrassed before her readership.

Big Mo and her fans don't care about any of THAT stuff. Never have. Never will.

In fact, applying the kind of ineluctable logic Charles employs, one can deduce from Big Mo's past columns that there is at least a seventy-three percent probability that Big Mo has a plaque on or near her desk (and an eighty-seven percent probability if one also includes her kitchen refrigerator) that says:

“There is no use in trying,” said Alice; “one can’t believe impossible things.” “I dare say you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half an hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast”. Lewis Carroll

Charles also points out an article by Rod Dreher on the hows and why of Marthahate.

I think there is more to Marthahate than resentment of perfect flower arrangements or Martha's fussy, unproven and/or incomplete recipes or even her supposedly harsh personality. After all, how many people know Martha Stewart, anyway, and how many other beloved public characters are not nice personally?

Marthahate seems concentrated in the population of journalists, lawyers, entertainment industry representatives and some other professionals. The roots of Marthahate are not pretty: Marthahate is largely envious and to some extent racist and poisoned with class resentment. It seems to infuriate some people that Martha Stewart made all that money and acquired all that influence mostly just by fussing with, extending and developing things that were available to every middle class kid, quite literally around the house. Martha's critics are mostly upset that she has made so much of opportunities that they threw away or never even realized they had in the first place.

The "insider trading" aspect of the current scandal is inflamatory on an emotional level because it gives these people a way to tell themselves that she didn't really just develop and make those opportunities that they had, too, but threw away. IT"S IMPORTANT TO MS. STEWART'S CRITICS TO BELIEVE SHE CHEATED, SO THEY CAN FEEL BETTER ABOUT THEMSELVES.

Many of Martha's critics also deny and hide another aspect of their feelings: resentment that she is a Polish American woman from Nutley, New Jersey. But the drive in some of her critics and hit-biographers to "out" her as not "really" being from an old-money WASP family is pretty clearly driven by such race and class based bigotry.

In many ways, Marthahate is similar to Rowlinghate. One cannot read the reviews of Ms. Rowling's Harry Potter books and her spectacularly successful and lucrative movie without detecting a certain theme among the more negative reviewers: Some critics are just resentful that Ms. Rowling made all that money and obtained all that success by what the reviewers see as a reworking of the Lord of the Rings and some other literary staples that all of the critics read years ago and didn't make anything of at all. And it's all the more annoying to such people that she was a single, welfare mom.

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Sunday, June 30, 2002

Savaging Martha II

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jane also suggests that companies should:

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

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

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

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

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

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

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