Man Without Qualities

Friday, July 12, 2002

And Who Could Say Him Nay?

"Note the subtle differences between the genders: I like to think of the male as the lesser of two weevils."

- Doctor Weevil
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Dangerous Nonsense

Excerpt from Demosthenes: "democracy shouldn't be defended because it is the only legitimate system... that's nonsense, and dangerous nonsense at that."

Excerpt from a "dangerous nonsense ":

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. --That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. ... The history of the present King of Great Britain [George III] is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.


He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.

He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.

He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their public Records, for the sole purpose of fatiguing them into compliance with his measures.

He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.

He has refused for a long time, after such dissolutions, to cause others to be elected; whereby the Legislative powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.

That Thomas Jefferson. He actually seemed to think that the justification for the Revolution and the illegitimacy of British rule over the colonies had something to do with abrogation of electoral democracy! Worse, he says that governments only exist to protect human rights and that elections are a necessary part of that - and that all this was determined by universal principles that applied, well, universally, to everyone, everywhere, all the time. Always being goofy. And dangerous, too. Let's not forget dangerous.


Other excerpts from Demosthenes:

[I]f a state is not a member of the UN and not a signatory to its treaties, then the UN has no authority over it, and it need not pay attention to a single word the UN says.

If Musil's argument were actually correct, the U.N. would have authorized forcible change in South Africa, and it knew that it had no authority to do so. (Nor did it in the informal traditions of the international system... one of the key precepts of that system is that what goes on within a state's own borders is its own business, although other nations are free to disassociate and/or condemn that state if they wish).

Interesting. Neither of the Koreas was a member of the United Nations until 1991, but somehow that doesn't seem to show up as a relevant fact in this excerpt from the Report of The United Nations Commission on Korea, 1950:

[T]he United Nations Temporary Commission ... had been charged by the General Assembly to observe the holding of elections on a democratic basis in the whole of Korea. In the circumstances, it was decided to hold such elections in South Korea alone.

Had internationally supervised elections been allowed to take place in the whole of Korea, and had a unified and independent Korea thereby come into existence, the present conflict could never have arisen.

... It did, however, appear to the Commission, before the aggression took place, that unification through negotiation was unlikely to be achieved if such negotiation involved the holding of internationally-supervised elections on a democratic basis in the whole of Korea. Experience suggested that the North Korean authorities would never agree to such elections.


The necessity to safeguard the stability. and security of the Republic of Korea from the threat from the North gradually became a controlling factor in all the major activities of the administration of the Republic, and absorbed energies and resources which were needed to develop the new form of representative government and to carry out the economic and social reconstruction programme.

The first two years of the new National Assembly reflected clearly the difficulties which it would be normal to expect in a body dealing with a new and unfamiliar political structure. It had become clear, long before the act of aggression occurred, that the Legislature was making good progress in its efforts to exert parliamentary control over all departments of government, and would not rest content until its relations with the Executive had been satisfactorily adjusted. The growing civic responsibility shown by the legislature augured well for the future of representative government in Korea.

At the elections of May 30, 1950, the people showed very considerable enthusiasm, and the electoral machinery functioned 'well. ... Although there appeared to be little justification for interference in some other cases, the results of the elections, in which many candidates critical of the Administration were returned, showed that the voters were in fact able to exercise their democratic freedom of choice among candidates, and had cast their votes accordingly. The results also showed popular support of the Republic, and a determination to improve the Administration by constitutional means.

Now after getting themselves all wound up in that confused dither over all this dangerous nonsense about elections goings-ons in a non-member state that was not a signatory to its treaties, and over which it had no authority, and which didn't even need to pay attention to a single word the UN said, the UN went right ahead and authorized an invasion of Korea, as noted in this excerpt from EVENTS OF THE KOREAN WAR:

From the day when North Koreans attacked South Korea on June 25, 1950 to the day of the armistice on July 27, 1953, the events of the Korean war revealed the mass destruction, pain, and suffering Koreans had to endure. At the end of the war, more than 3 million Koreans died while millions of refugees remained homeless and distraught. About 1 million Chinese died in this battle a nd American casualties numbered 54,246 people. This section will explore and follow the events, strategies, and atrocities of the Korean war.

The Korean war can be divided into three phases.

The first phase began on June 25, 1950 and ended on the day United Nations (U.N) forces thrusted into North Korea's territory.

The second phase of the Korean war was essentially the Southern unit's attack and retreat from North Korea.

The last phase of the war consisted of the "see-saw" f ighting on the thirty-eighth parallel, stalemate, and negotiation talks.

On June 25, 1950 at 4 a.m., 70,000 North Korean troops with Russian T-34 tanks crossed the thirty-eighth parallel. President Truman appealed to the United Nations to take "police action" against the "unwarranted" attack. Hence, under the "name of the United Nations", the United States was able to send troops and forces.

According to Demosthenes, it was all a big mistake! North Korea was just trying to demonstrate that all-important sovereignty over the southern part of the Korean Pennisula - in this case by showing they could slaughter several hundred thousand South Koreans who had dared to participate in those elections. Here we have reached the root of the problem. We already know from Demosthenes that: "Sovereignty does exist. That isn't in question." But under Demosthenes' principles, just how many South Koreans did the North Koreans have to show they could slaughter in order to demonstrate "sovereignty" over the South, and, more importantly, "who gets to decide this, and why?" Well, instead of authorizing the Korean War to stop the murder of hundreds of thousands of people and the cessation of what we now know from Demosthenes was utterly meaningless electoral democracy in South Korea, the Security Council should have spent it's time constructively - and within the principles of international law as adumbrated by Demosthenes - by perhaps setting up a tribunal to adjudicate the all-important "sovereignty" question. That tribunal, in turn, could have articulated meaningful, objective international standards for settling the question. For example, the tribunal might have held that any country that can demonstrate its clear ability to murder at least 1/3 of its total populace in, say, thirty days, has established its "sovereignty" and is therefore entitled to legitimacy and the respect of the international community. Of course, there would still have been the issue of Korea not being a member state of the UN, but maybe that could have been handled by one of those "deals" Demosthenes likes so much.

Demosthenes is entitled to believe and write as he chooses, even if that includes believing and writing that governmental legitimacy does not depend on elections or democracy, and that the UN has no authority over non-member states that are not signatory to its treaties, and that such states don't need to pay attention to a single word the UN says.

But when the ships carrying, say, One Million troops show up on the horizon with the specific intent of thrusting into your territory pursuant to a United Nations Security Council writ, most people would say that it's time to start taking notes.


There is a debate going on about dictators over at InstaPundit and various other sites the links lead to. Oddly, all of the people involved in that debate seem to be assuming that legitimate governments have to be elected. Demosthenes may want to go over there and straighten those people out. Dangerous people. Dangerous.

Other people are also confused [scroll down to "DEMOSTHENES PROVIDES AN ELOQUENT DEFENSE"]. Lots of work to do. Lots.


Another excerpt from Demostenes:

No, Robert, anarchists do not reject "all law"... they reject a state body, but most true Anarchists believe in radical democracy... government by consensus.

Two definitions:

Pronunciation: 'a-n&r-kE, -"när-
Function: noun
Etymology: Medieval Latin anarchia, from Greek, from anarchos having no ruler, from an- + archos ruler -- more at ARCH-

Date: 1539

1 a : absence of government b : a state of lawlessness or political disorder due to the absence of governmental authority c : a utopian society of individuals who enjoy complete freedom without government

2 a : absence or denial of any authority or established order b : absence of order : DISORDER


Pronunciation: 'a-n&r-kist, -"när-
Function: noun
Date: 1678

1 : one who rebels against any authority, established order, or ruling power

2 : one who believes in, advocates, or promotes anarchism or anarchy; especially : one who uses violent means to overthrow the established order - anarchist or an·ar·chis·tic /"a-n&r-'kis-tik, -(")när-/ adjective

Demosthenes is completely correct that lexicography is not an exact science, and a dictionary is not an irrefutable source, and with respect to the nuances of many words (especially for charged terms such as "anarchist"), a dictionary is not a source at all. Of course, for Demosthenes' sweeping argument it doesn't matter what he meant by "anarchists," since they were just straw men to demonstrate that "universal principles" are dubious: "Anarchists don't believe in this kind of principle, so it can't be universal." Demosthenese could as easily have chosen Marxists, Rosacrucians - or true "anarchists" as the the term is normally used (and defined above), or "anarchists" with whatever unexplained specialized meaning he now says he intended but did not write, or anyone else. His argument is just as sweeping and just as specious. Here, I'll try one: "Some people, including the [insert name of favorite primitive tribe], don't believe in gravity, so it can't be universal." Oops. We didn't all float away because I wrote that. Not even Demosthenes.
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The French Don't Have A Word for It Anymore! IV

UPDATE: Eschaton posts some nice sources and quotes that support the position of the Journal article. It's sad that a people that produced Jean Bapiste Say has ended up where they are now.

Also, Atrios might want to keep in mind that this blog is written under a borrowed pseudonym. There is no point in juvenile mutilation of the great name "Musil" just because Atrios doesn't like what is written here. But of course that up to Atrios. "Musil" will not be impaired one way or the other by any silly business on Eschaton..

But I do thank Atrios for his lively comments and criticisms.


The Wall Street Journal has an interesting article on the French revolution and the decline of France, which traces the divergence of French society from its original respect for the entrepreneur:

Of course this was also the beginning of the Industrial Revolution, but again France missed out. Some historians believe that France's industry was actually expanding faster than Britain's in the century before 1789. However, the revolutionary turmoil, the currency collapse and the demands and disruption of war all took such toll that French manufacturing took 20 years to recover the output it had achieved in 1789. By contrast British industry in the decade 1800 to 1810 grew 23% and in the subsequent decade by 39%.

Napoleon famously despised England as a nation of shopkeepers, but the revolutionary leaders who preceded him were even more virulent in their scorn for trade. Far more merchants than aristocrats were dispatched to the guillotine. Robespierre and Co. quickly adopted protectionism, which continued under Napoleon in his Continental system. That protectionist spirit still informs French thinking today, and it unfortunately dominates the French-style administrated European Union. Laissez-faire is a French phrase but it was the Brits who practiced it. Ditto for "entrepreneur."

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It's The Flash That Seduces

Improprieties justifiably get a lot of easy media play, but they are only one variety of business mistake. Even after they are revealed, improprieties can obscure deeper underlying bad business decisions on the part of both management and investors - because the impropieties are so flashy and psychologically it's easier for investors to accept that they were robbed by someone else than that they personally made a bad choice: Overlawyered makes the point in connection with telecoms:

[B]efore assuming that it was management malfeasance alone that destroyed the market value of such companies as WorldCom and Adelphia, it would be wise to note that Europe, without benefit of major scandal, has managed to see most of the value of its telecom stocks evaporate since the sectoral bubble burst, with historic enterprises like Deutsche Telekom, France Télécom and Royal KPN of the Netherlands losing 80 or 90 percent of their value, and Britain's BT doing not much better (Edmund L. Andrews, "Europe Shares Pain of the Fall in Phone Stocks", New York Times, Jul. 11).

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Thursday, July 11, 2002

The French Don't Have A Word for It Anymore! III

When I first and again posted on this topic I expected to receive comments pointing out that any 'defense" of Bush was irrelevant because his critics were already doing the job for him.

After all, it is really difficult to imagine a more sure-fire way to lose an election in this country that to argue that voters shouldn't vote for the other candidate because HE DOESN'T KNOW HIS FRENCH VOCABULARY (OR WORSE, IN THIS CASE, HOW ENGLISH WORDS WERE DERIVED FROM THE FRENCH). Really, who needs to defend a man whose political opponents are already committing suicide on the point in question?

Can one imagine an American politician putting this criticism in a stump speech? Strangely, in this case, one can just barely imagine Al Gore doing just that.

But although these posts have received an unusual amount of commentary, that particular criticism has not appeared.

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Make Time for Mindles!

Wonderful stuff from Mindles. Make time for it. You'll thank yourself later - maybe even during.
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The French Don't Have A Word for It Anymore! II

Over at Eschaton, where Atrios began by suggesting my post on this subject suggested serious mental illness on my part, the comment thread has concluded that: "The French do not have a word for entrepreneur" - but they do have the "concept."

I don't remember the President saying that the French didn't have a concept for "entrepreneur."

Did he say that, too?

And I wonder if Atrios thinks his readers/commenters are also "hilarious," involved in "self parody," and "in the advanced stages of sycophantic psychosis." Such a delicate use of language on his part in any event.
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Illegitimacy II

Demosthenes continues his earlier line of thought, in large measure apparently asserting the legitimacy of non-democratic states from his understanding of international law.

The point of my original posting on legitimacy and international law started from the observation that most versions of international law do consider non-democratic states as capable of legitimacy, which I consider to be an error which rejects universal political principles discovered in the eighteenth century. That's the problem with existing international law that I wanted to address.

Demosthenes is free to disagree, of course, but I am not really sure why he has put so much effort into showing that his version of international law also considers non-democratic states as capable of legitimacy.

Demosthenes also seems to make rather heavy use of an argument that if there is no official authority to make a particular determination, then the determination cannot be part of international law. For example, he seems to feel that the concept of "electoral democracy" is hopelessly undefined unless we know the details of the actual constitution and "who gets to decide this, and why."

However, since there is not now and never has been a set of official authorities making any such determinations in international law, Demosthenes' argument seems to be nothing less than a complete rejection of the very concept. Demosthenes oddly and unsuccessfully tries to skirt the problem by holding his own set of truths to be self evident: "Sovereignty does exist. That isn't in question," he says. Well, excuse me, but I think it is a not only question but an unsupported political conclusion on Demosthenes' part. In fact, in the case of countries that could easily be invaded and their governments deposed, "sovereignty" is virtually a legal fiction.

Demosthenes supports his position by alluding to supposed anarchist positions. But anarchists reject all law - which nevertheless does not seem to tip Demosthenes off to the likelihood that his arguments prove too much, to say the least.

Democratic principles are first and foremost principles of human rights. Indeed, structural federalism itself is bottomed on protection of human rights. But by Demosthenes ' troglodytic approach to international law, "human rights" are as much hopelessly airy-fairy constructs as is "democracy" itself, and should have no bearing on legitimacy. After all, when it comes to defining human rights, what do we mean? Do we mean the American "Bill of Rights?" No. No. No. Those are all too culturally specific by Demosthenes standards. And since we don't know "who gets to decide this, and why," we'll just have to leave that part out and concentrate with Demostenes on whether the dictator has enough power to kill his opponents. But, then, even with regard to the question of whether the dictator has enough killing power, "who gets to decide this, and why?" So many problems!

By his failure to support his assertion, it appears Demosthenes also seems to think that it is a self-evident truth that "if a state is not a member of the UN and not a signatory to its treaties, then the UN has no authority over it, and it need not pay attention to a single word the UN says." Demosthenes may choose to believe such a thing, but it would come as a surprise to the United Nations that its various boycotts and other sanctions imposed against South Africa (which, of course, was not a member of the United Nations at the time) were not supported by international law. And while Demosthenes says that a non-member state need pay no attention to anything the United Nations says, the United nations seems to disagree enough to have promulgated hundreds of actions against non-member South Africa, which that international body thought South Africa had some obligation to pay attention to.

It is also worth noting that the UN did not consider South Africa to be a legitimate state notwithstanding its satisfaction of all of Demosthenes' criteria for legitimacy. And the UN did this largely by citing to the kind of "universal principles" that Demostenes rejects - even dismisses as non-existent. The South African government was excluded from the General Assembly in 1974 when its delegation’s credentials were rejected. It was also excluded from other UN organs and conferences, as well as from most specialised agencies and inter-governmental organisations. Both the General Assembly and the Security Council declared the 1984 South African constitution, which excluded the African majority, invalid. The United Nations defined its objectives as the total elimination of apartheid and the establishment of a non-racial democratic society in an unfragmented South Africa in which all its people would enjoy human rights and fundamental freedoms, irrespective of race, colour, sex or creed. In resolutions adopted by large majorities, it recognised the right of South African liberation movements to resort to armed struggle, declaring that "freedom fighters" were entitled to prisoner-of-war status. Is the point here supposed to be that the UN had the right to do all this under international law because South Africa had been a member at one time, even though the sanctions really kicked in only after South Africa was kicked out? It's hard to imagine even Demosthenes seriously advancing that argument.

Which brings up another point. I have bottomed my discontent with international law, and especially the version that plays at the UN, on its democratic deficit. But Demosthenes asserts a theory of governmental legitimacy so extreme in its rejection of democratic principles that not even the United Nations shares his views, nor do most dictators dare to express such justifications. Not even Hitler and Stalin were as extreme in their rejection of the need to pay at least lip service to democratic principles as is Demosthenes. Indeed, Stalin and most other dictators orchestrated periodic rigged elections to provide their own legitimacy. Even Hitler was elected. Demosthenes says they need not have bothered.

So even the UN and most murderous dictators in modern history have advanced further in their understanding of the importance of democracy to legitimacy than Demosthenes has.

Demosthenes also says he is "rather tempted to declare victory and go home." At least part of that resolution is in order.

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Halfway Poll

At the halfway point in this year’s general election campaign for California Governor, incumbent Democrat Gray Davis holds a seven-point lead among likely voters – 41% to 34% – over Republican Bill Simon, according to the latest Field Poll.

Which means that Davis’ lead has now been halved. In April Davis was leading Simon by fourteen points – 43% to 29%. Worse for Davis, the poll's sampling error is 4.0 percentage points - so his 7 point lead is now within that error margin.

Davis has acquired an enormous campaign fund, which, curiously, appears to be generating some of his larger problems. Davis' huge appetite for campaign money has led to various corruption suspicions against him that seem to be helping to drag him down. There are now several of these scandals brewing in connection with Davis, and Simon has not yet systematically focused on them as a campaign issue.

Davis has other issues, of course, including signing up for wildly overpriced long-term power contracts which the State has been renegotiating with only modest success. It's hot now in California, and people are paying for major doses of power under those contracts.

Just 39% say they have a favorable view of Davis and 28% say this for Simon. In contrast, 51% of likely voters have an unfavorable opinion of Davis, as do 39% in regard to Simon. The proportion rating Davis unfavorably has been 50% or more in each of four Field Poll measures conducted this year, where Simon's unfavorability rating has been steadily rising - a trend helped in part by a barrage of hostile Davis ads.

A potentially huge wildcard in this election is the State budget, which is now stalled. The California constitution requires a 2/3 vote in the legislature to pass the nearly $100 Billion budget, which is now running severely in the red.

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Wednesday, July 10, 2002

George W. Bush: Monkey, and Proud of It?

One of the Man Without Qualities' astute readers notes that a consequence of an earlier post is that George W. Bush isn't the Smirking Chimp, but the Signifying Monkey.

That may well be correct, and I suppose the President would be proud to be such a monkey. I would.

As one site describes it:

Henry Louis Gates, Jr. wrote The Signifying Monkey, a highly influential modern study of how African-Americans characters speak in the works of some writers, notably Zora Neale Hurston. Gates links the style of speech of these characters to African traditions of storytelling, and suggests that their way of expressing themselves is at the same time guarded (because of the need for caution in a white-run society) and ironic (because they feel powerful nonetheless, in their inner estimation of themselves and their interactions with the African-American community).

Similarly, one can understand Mr. Bush's need for caution in the company of self important but narrow-minded liberals such as most American media representatives, or European derigistes such as Blair and Chirac. And yet he clearly senses his own power, not just by virtue of his office but because he feels powerful, in his inner estimation of himself and his interactions with many American communities, including people of faith. Indeed, Mr. Bush defeated Al Gore, a man of many intellectual pretensions whose supercilious bearing and approach, and that of his campaign and especially some of his supporters, at times suggested that he and they believed him to be running for President of France.

It bothered the Europeans and those of similar mind then, and it appears to bother them now

UPDATE: And with even more supercilious bearing and approach, but expressed without more than namecalling, now.

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Matt Yglesias posts some well considered thoughts on international law and the illegitimacy of non-democratic governments (although at least one of his commenters may want to consider reading beyond Hobbes and Locke, maybe starting with the self evident truths of the Declaration of Independence).

I agree with Matt that merely because a government is not legitimate does not mean one should have no dealings with it, or refuse to join organizations of which it is a member, or gratuitously alienate it.

What a lack of legitimacy does do, among other things, is deprive an illegitimate government of the benefits of certain arguments and legal principles. For example, the rights of a legitimate government to defend itself, its territory and its interests are well established - although not absolute. One hears a false version of these principles from the UN and its apologists in the form of: "Every nation has the right to defend itself." No. Every democratic nation has a right to defend itself and be free of unwarranted outside force on the basis of its own legitimacy.

Practically, this means, for example, that the government of Israel has a clear right to defend itself and Israel generally, and, correspondingly, to be free of outside applications of force. The same cannot be said of Iraq or other non-democratic states, including most of the membership of the United Nations. This asymmetry is not recognized at the United Nations, which is wrong but inevitable.

It does not follow from the mere illegitimacy of a government that it is an "outlaw" in the sense that another country is automatically free to invade and destroy an illegitimate government. There may be other reasons why an invasion is improper: unacceptable loss of life and destruction of property, for example. But if those considerations can be balanced by, for example, the prospect that the illegitimate government may be engaged in terrorist or other activities that might themselves result in loss of life or property, then the right of such a nation to be free of foreign assault should pose no barrier to an attack. With respect to some non-democratic countries - such as most Arab countries, some African countries and Haiti - a foreign invasion might take a toll even less severe than the cumulative daily toll taken on the local populace by the sitting illegitimate government. In such cases, the right of any foreign power to destroy such governments may essentially be within the discretion of the prospective invader. With respect to a democratic state, the calculus becomes vastly more difficult and complex. It's not surprising that the United Nations doesn't cotton much to such principles.

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The Talented Mr. Levitt

In the weeks following the breaking of the Enron scandal, Arthur Levitt pointed to his proposed "accounting reforms," such as greater separation of the audit and consulting services of accounting firms, thereby cleverly obtaining laudatory media coverage for his tenure as head of the Clinton SEC. Business Week, among many, provided this obligingly guileless February thought:

"During his tenure as chairman of the Securities & Exchange Commission, Arthur Levitt Jr. took a lot of heat from the accounting industry and Corporate America for his plan to strengthen enforcement of securities laws and require far greater disclosure from companies. At the time, Levitt's comments sounded alarmist to many. Levitt, of course, was right."

It is time - and it has now long been time - to stop listening to Mr. Levitt's clever spin and to call him to account.

Under the management of Harvey Pitt, its current chief, the Securities and Exchange Commission has uncovered quite a few very large irregularities originating in the Levitt years. Mr. Pitt has not required whatever enhanced legislation or regulation or accounting rules or practices Mr. Levitt said he needed to do the job.

Nor do most of the alleged or apparent irregularities have much to do with any of the supposed "reforms" Mr. Levitt hides behind. No one is saying that WorldCom or Xerox or Global Crossing or whatever company hits the screen tomorrow were themselves led astray by consultants, nor is anyone seriously suggesting that the auditors for any of these companies were compromised by imprecations from their consultant partners in need of business (Mr. Levitt's big hobgoblin), nor are we hearing that fancy off-balance-sheet "structured finance' transactions (or the accounting therefor) were the problem. No.

The most serious alleged problem is the old fashioned problem: deliberate fraud and simple lies. WorldCom isn't said to have deliberately and nakedly misstated its expenses because of some nuanced accounting rule or subtle conflict of interest. WorldCom is thought to have just lied. And WorldCom is said to have started doing that a long time ago - while Mr. Levitt was at the helm of the SEC announcing that he was deliberately diverting that agency away from "established companies" to tend to the IPO boom.

The term "established companies" for Mr. Levitt included companies such as Enron, whose stock rocketed upwards because Mr. Lay chatted about e-commerce and broadband trading - and then didn't come down when the Internet boom went bust. Is that the way the stock of an "established" company behaves? Was there anything in any of the public circumstances of Enron that might reasonably have attract Mr. Levitt's attention? What the recent scandals prove is the almost unbelievably bad judgment Mr. Levitt employed in adopting his crude "established/non-established" dichotomy in allocating SEC resources.

While the financial world has known for a while that some new forms of businesses (such as trading in electricity or rentals of telephone wires or broadband sales) have created opaqueness, gaps, quality-of-earnings issues and opportunities for abuse in the financial reporting of companies involved in such businesses. As Pat McConnell, a Bear Stearns accounting expert puts it:

There is little doubt that the financial reporting system needs improvement and likely always will. There are still important areas of accounting, such as some revenue recognition practices, that became generally accepted before there was a conceptual framework for accounting or indeed before there were even any recognized accounting standard setters. These areas need to be brought in line with the FASB's conceptual framework, and updated for our modern business environment. To its credit, the FASB is attempting to do this as its time and budget permits. The natural evolution of business practices will also require constant modification of the financial reporting system. It is almost inevitable that new business transactions will emerge before rigorous rules to account for them. The existence of a conceptual framework helps answer questions in areas where rules have not yet been established, but it is desirable for there to be a formal accounting standard to deal with the situation sooner rather than later.

The SEC had a clear awarness that such problems, and opportunities for problems, had developed in areas of the economy serviced by established companies. Indeed, much of the FASB rules reform in this area was prompted by SEC action. But the SEC's investigatory and enforcement actions did not follow suit. There is no indication that Mr. Levitt directed the attention of his enforcers and investigators towards such companies. It is hard to imagine a more misquided application of agency resources - and Mr. Levitt is responsible for that misapplication. Paying increased attention to such businesses might have made a real difference in some of these cases, unlike Mr. Levitt's mostlky irrelevant "reforms." Enron's collapse prompted much of the Levitt spin regarding his defeated "reforms," but notably lacking from the evidence adduced at the recent Andersen trial was any indication that the consulting/audit threat that Mr. Levitt's "reforms" purported to address played any role in the Enron/Andersen disaster. Nor has that dichotomy surfaced as a contributing cause in any of the other recent scandals.

In short, Arthur Levitt himself has some serious personal media reporting issues. The mounting corporate reporting irregularities are much too widespread to written off as inevitable - especially since Mr. Pitt is finding them and it is increasingly obvious that Mr. Levitt's proposed and rejected "reforms" are and were irrelevant to the real problem at the SEC: Under Mr. Levitt, enforcement of existing laws using standard techniques did not catch or prevent a lot of very serious fraud that is surfacing now. Congress and the media should be asking for a serious explanation from Mr. Levitt - and not settling for his mantra that he proposed reforms that were not adopted.

Rather, Congress and the media should all be asking: "MR. ARTHUR LEVITT. WHAT WERE YOU DOING WHILE ALL THIS WAS GOING ON?"

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The French Don't Have a Word for It Anymore!

It is being reported that Tony Blair told a friend the following anecdote:

"Blair, Bush and [French President] Jacques Chirac were discussing economics and, in particular, the decline of the French economy. 'The problem with the French,' Bush confided to Blair, 'is that they don't have a word for entrepreneur.' "

If this wonderful story is true, George Bush is vastly more insightful - and funnier, and a little bit meaner - than one could have imagined.

The assertion is clearly correct, notwithstanding the obvious French origin of the word "entrepreneur." In English, one uses the expression "The French have a word for it!" where English includes words that would convey the basic meaning of what one intends to say, but it is the French who have crafted the one word that expresses all of the exquisite and exact nuances. Often there is even a single English word that would convey the basic meaning - but its meaning has been cluttered by distracting secondary associations - so one reaches for the purity of the French.

And in this sense, the French clearly do not have a word for "entrepreneur."

It is not an isolated occurrence. Today there are many wonderful ideas that were originated or brought to fruition by the French, but of which those wonderful people now have only an uncertain grasp. One might start with the principles of modern democracy, where the original insights of eighteenth century political thinkers really made the difference. Then there is the concept of modern financial securities and the corporation - where more recently the French securities markets and corporate culture have long seemed to exist in some twilight demi monde.

But perhaps the most spectacular example of the French losing their sure grasp of their own idea is in the case of "abstraction" itself. One can hardly overstate the importance of French-style abstraction in every area of modern life. French abstract political considerations - "separation of powers!" - are the absolute bedrock of the rights of man. That which was abstract French mathematics at its birth - Fourier series and transforms - provides the framework and vocabulary for all of modern science and engineering. Continuing extensions of this approach have recently given rise to information compression technology that powers the Internet and much else.

And then there is Matisse - who neither accepted the plein aire approach of the Impressionists (although he understood them) nor submitted himself to any living academic teacher (although he worked in their studios), but spent years studying and abstracting the great masters of the past. Here was an intellect and an eye that assimilated the Apocalypse of Saint Sever - a set of medieval religious illuminations - and abstracted its artistic force to create Jazz and many of his later works that at a stroke prove an optimistic universal unity that we have somehow in the hurries of modern life simply overlooked. That Matisse contributed more than genius - and that mere genius, as such, of even the highest caliber, is but a modest gift in whatever sphere it is in which artistry intersects our most basic understandings of the value and oneness of human life - can be sensed from the fact that this same Apocalypse of Saint Sever also informs the un-French, fragmenting, pessimistic Guernica created by the Catalan Picasso.

Once could go on for pages with just a list of the awesome products of French and French-style abstraction. But in each case, the French themselves seem to have lost their way. It has been said that there are two species of abstraction: that in which one is boiling down, boiling down, boiling down to an essence - and that in which one is just thinning out, thinning out, thinning out, tossing in buckets. The French leapt this particular species barrier sometime during the 20th century, and we are all the worse for it.

"Entrepreneur"? Today, the term in France is suffused with a certain suggestion of the sociopath, of the cowboy now so dreaded in that country.

Mr. Bush was correct: The French have no word for "entrepreneur." Perhaps they once did. It must have fallen out of a tear in their pocket during the war, or perhaps it escaped through a hole in the fence, or maybe it perished under an inadvertant ink blot from the quill of some well-meaning scholar at the Acadamie. But, whatever the reason, it's gone now.

But to actually have been able to say this, naturally, in conversation with the British Prime Minister and the President of France!? Could the President really have said such a thing?

My God, I wish I had said it - and not just have had it possess me as a diable de l'escalier!

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Tuesday, July 09, 2002

In The Room The Women Come and Go ...

Odd what turns up on upper Fifth Avenue.

The Associated Press and the New York Times both report that a chalk and wash drawing of a menorah found in a box in the Smithsonian's Cooper-Hewitt, National Design Museum is by Michelangelo. It has been unanimously authenticated by Italian Renaissance art scholars and is one of fewer than 10 Michelangelos known to be in the United States. The museum bought it for $60 in 1942 - and the implication from the articles is that the drawing has been in residence on Fifth Avenue since then (the Times says the drawing "languished unnoticed for decades right under the noses of swarms of art experts"). The Cooper-Hewitt is located at 2 East 91st Street (91st Street and Fifth Avenue) in New York City.

In 1976 another Michaelangelo drawing was discovered nine blocks south at the Met, 1000 Fifth Avenue at 82nd Street. The Met had bought that drawing in 1962, as the work of an anonymous artist.

Three blocks south of the Met, in the entrance hall of the Cultural Services of The French Embassy at 972 Fifth Avenue at 79th Street, you see The Marble Boy statue, which many experts believe is an early statue by Michaelangelo. The Marble Boy was also in residence on Fifth Avenue for years, but its possible Michelangelo origin was advanced only in 1996, and some scholars have expressed doubts.
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Short But Sweet

Will Warren crafts a set of short, wonderful new poems.
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Options V

Jane Galt posted a typically thoughtful response to my musings on executive compensation.

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Sunday, July 07, 2002

The SEC Tries To Stem The Shock?

Times have changed
And we've often rewound the clock
Since the Puritans got a shock
When they landed on Plymouth Rock
If today, any shock they should try to stem,
'Stead of landing on Plymouth Rock
Plymouth Rock would land on them!

Cole Porter, Anything Goes

The SEC is now requiring the Chief Executive Officer and Chief Financial Office of large public companies to personally certify the company's securities filings under oath penalty of perjury!

This is important stuff. The talking heads told us that. Even the author of the book Irrational Exuberance, Yale economics professor Robert Shiller, was on television telling us this was a "drastic but necessary measure" to restore investor confidence - and he was framed by a nice blue background bearing the tasteful and repeated word "Yale" on it, just to make the point. Professor Shiller is an accomplished economist, but one might wonder why he was pressed into this service, since his biography does not include credentials in the area of securities regulations - a highly technical and legalistic area peopled by its own specialists. But, curiously, although those specialists might have been out there somewhere, the Man Without Qualities did not see them, or even read their quotes in the reports concerning the new rule. Could that be because the new SEC rule actually means very little - except if the rule DOES have significant consequences, those consequences are likely to be mostly perverse?

The new rule says that when a large public company makes its 10-K (annual report), 10-Q (quarterly report) and 8-K (special event report) filings (called "covered reports" in the new rule) under the Exchange Act or 1934, its CFO and CEO must file a statement under oath which, among other things, says:

To the best of my knowledge, based upon a review of the covered reports ... , and, except as corrected or supplemented in a subsequent covered report, no covered report contained an untrue statement of a material fact ... ; and no covered report omitted to state a material fact necessary to make the statements in the covered report, in light of the circumstances under which they were made, not misleading as of the end of the period covered by such report (or in the case of a report on Form 8-K or definitive proxy materials, as of the date on which it was filed).

The Wall Street Journal says that some nameless lawyers the Journal interviewed said "that a criminal case based on lying in a sworn statement is generally much easier to prove than a complex accounting fraud."

It seems like only yesterday that the media were full of reports - prompted by President Clinton's own perjury in the Lewinski matter - that perjury is incredibly hard to prove, and that criminal charges in civil cases were almost never brought - and, in the eyes of some, were downright "unusual and flimsy." In those days, many Democrats and academics even said that "civil perjury" perhaps warranted the essentially symbolic disbarment of Mr. Clinton (who was not a practicing lawyer) - but certainly did not warrant impeachment. So maybe the actual penalty for breach of this rule will be equivalent to disbarring a non-practicing lawyer. Considering that the amounts involved in recent scandals have been in the BILLIONS of dollars, one might be forgiven thinking that a bad CEO or CFO might consider that an additional risk worth taking.

Further, the new rule only requires that the officer's statement be "to the best of my knowledge." The Journal reports that "exactly how the phrase 'to the best of my knowledge' will be interpreted remains unclear," which is more than a little strange because in common language as well as in the drafting of financial documents and regulations the phrase "to the best of my knowledge" has a clear, established meaning - and that meaning is NOT the same as "to the best of my knowledge after a reasonable investigation." If the drafters of this rule had intended to require a reasonable investigation, they could have said so - and they didn't. For example, the form created by the SEC that must be filed by holders of more than 5% of a company's stock (Schedule 13D) places just before its signature line the sentence: "After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct." The new rule does not do that. What the SEC did include is a statement that the statement is "based upon a review of the covered reports" - which just reinforces the fact that it need not be based on any additional due diligence investigation.

But the Journal's unnamed lawyers say that "the SEC will expect signers of the sworn statements... to conduct due diligence on the accuracy of their companies' results." It certainly makes sense that the SEC would have this expectation, but the new rule clearly does not require the signing officer to conduct a due diligence investigation. Most of the time - but by no means always - a sensible officer will conduct such an investigation, but the authorities will not be able to charge the officer for breaking this rule if the officer in fact does not conduct such an investigation.

Which brings up the muli-faceted perversity of this rule. The current hysteria over wrongdoing and alleged wrongdoing of company executives appears to have obscured the sound purpose of the securities laws: to deliver accurate and complete information to the investing public. The purpose of the securities laws is not to put bad executives in jail. The threat of such criminal sanctions is only appropriate if the net effect of such sanctions is likely to increase the delivery of accurate and complete information to the investing public. But the net effect of this new rule will likely be to reduce the amount of accurate and complete information to the investing public.

Suppose the new rule has a substantial effect, despite my reservations on that point above. As noted, the rule does not require due diligence. So it may well create a strong incentive for signing executives to have "clean hearts and empty heads." If this rule incentivises senior officers to be ignorant, it probably will reduce the reliability of company information.

Moreover, if a signing officer had previously certified reports that included false or misleading information, then disclosure of that information in subsequent reports will create the risk of criminal prosecution of the certifying officer. As the Journal's nameless lawyers put it: "After the sworn statements are submitted, subsequent revisions of financial reports could potentially expose executives to criminal charges." Very true. The possibility that an executive could be so criminally charged could be a very good reason for such an executive not to order an investigation and, if errors are discovered, it could be a good reason not to disclose it to the public, say in a corrected or supplemented in a subsequent covered report.

But the new rule says that the executive is responsible for material misstatements "except as corrected or supplemented in a subsequent covered report?" Does the executive actually have an enhanced incentive to investigate so that he can correct past errors? Well, if that's what the rule means, then it really is meaningless, because under that construction of the rule the company can file a corrected report at any time - which will mean the executives would then be off the hook. The new rule's drafting is surely a dog's breakfast - and the exception for misstatements "corrected or supplemented in a subsequent covered report" may completely gut it. But if the rule is to have any substantial effect, there has to be a threat of liability to the executive for past misstatements - and that has to create an incentive not to investigate and/or disclose.

Additionally, if a certifying officer does not know the covered reports are wrong, then the signing officer will have to weigh the costs and benefits to that officer of doing an investigation. For example, the new CEO of WorldCom is reported to have innocently sent an internal auditor to do a routine check of the companies capital accounts, which turned up that disaster. If the WorldCom CEO had certified to even one prior set of financials, would he have been as likely to innocently send in his auditor? This question just doesn't have an easy answer - but it is certainly possible that the answer is "he would not have been as likely to send in that auditor."

But suppose, despite the rule's apparently clear language to the contrary, a due diligence investigation is held to be required of the signing executive by the rule. What would that mean? Whatever else it means, it certainly means that if something goes wrong some outside government agent - SEC representative, prosecutor, judge or jury - will be second-guessing what kind of due diligence investigation was or could have been conducted. So the executives will have a big incentive to create a really nice and expensive paper trail to document that a very elaborate due diligence investigation was conducted, which turned up nothing.

Does any sensible person think that a company committing actual fraud in its SEC filings would not also be able to create such a paper trail?

Looks like we may find out.

At least the Commission did not attempt to put into effect the seriously counterproductive suggestion of Treasury Secretary Paul O'Neill (endorsed by Burton G. Malkiel of Princeton) that CEOs should personally vouch for the veracity and fairness of their company's financial statements and be held personally criminally liable simply because the firm's statements later prove to be misleading.

And certainly the SEC under Mr. Pitt has been vastly more effective and constructive than it was under his predecessor, the largely comatose Arthur Levitt, and Mr. Pitt has been vastly more constructive in his approach than the erratic and dangerous Tom Daschle. Senator Daschle "faulted Chairman Harvey Pitt for having 'too cozy a relationship' with those his agency regulates, including meeting with accountants he used to represent "on many occasions before issuing regulation." Senator Daschle is deliberately ignoring that almost all of the emerging accounting irregulariities arose or began in earnest under Mr. Levitt's reign during the Clinton administrations. Senator Daschle is a hugely destructive force in the Senate and the nation - and this malfeasance is only the most recent example.

But it would be better if the SEC and the Congress as a whole could bring themselves to deam a better dream.

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