Friday, February 22, 2002

In TNR, Joshua Marshall discusses yet another Bush nominee whose qualifications for his post are, perhaps, unique:

Later this spring, if all goes according to plan, Taiwanese President Chen Shui-bian will receive a most unwelcome visitor: Mr. Douglas H. Paal. Just over a year ago Paal, a former East Asia and China policy adviser to the first President Bush, publicly lambasted Chen for a litany of failures. Chen had "stumbled" in his first months in office, Paal wrote in a widely noted column in the International Herald Tribune. His inability to "assemble a working coalition" had left him "floundering for a strategy to rebuild his authority. The ineptitude of his administration had the misfortune of coinciding with a downturn in the global market for Taiwan's high technology goods."


All of which makes Paal's impending arrival in Taipei somewhat surprising. Because if things go as planned, Paal will be there as director of the American Institute in Taiwan--America's de facto ambassador, given our unofficial relationship with the island nation. "I've been in this business for over thirty years, and I don't know of another instance where we sent someone out as a chief of mission who had publicly attacked the host country's chief executive," says Bill Triplett, a former chief Republican counsel to the Senate Foreign Relations Committee. "We're clearly plowing new ground here."

He joins such other uniquely qualified Bush appointments as John Poindexter, made head of the Information Awareness Office, a new uber-spy agency (implicated in the Iran-contra arms sales and coverup), the controversial Charles Pickering, nominated to a circuit court judgeship, and a former advocate of (among other things) bans on interracial marriage, Otto Reich, recipient of a recess appointment as Assistant Secretary of State for Latin American affairs (who ran, among other things, an illegal propaganda operation during the Reagan administration --- not that we'd consider anything like that now, of course) and J. Robert Brame, briefly nominated for a slot on the National Labor Relations Board (an advocate of replacing the U.S. code with a nasty theocracy based on old testament law).

(Brame has since withdrawn).

Nothing like those sleazy Clinton associates, that's for sure.

(For the dedicated Enronaut, by the way, Marshall also has more on the Ralph Reed angle, including the tangled web between Enron, Reed, and Bush political guru Karl Rove).

Thursday, February 21, 2002

On Coyote at the Dog Show, Anthony comments:

Barry Harkness makes an interesting observation in his comment to Megan McArdle's post on unverified reports from Iran that Osamas's right hand man is in custody. Harkness wonders whether the always photogenic and never camera shy OBL could be alive, given how long it's been since he put out a tape.

I mention this to explain, by way of example, why I try not to comment on other peoples' blog posts without having some thoughts of my own to add to the matter at hand.

But I'm breaking with that policy to point out an interesting new blog, Lagniappe. The proprietor, Derek Lowe, has interesting things to say about the pharmaceutical industry, with which he's personally involved, and matters farther afield, including an interesting (and frightening) piece on Japan.

One of the things that makes the blog interesting, though, is Lowe himself, who has an interesting dual career --- as a biochemist in the pharmaceutical industry and as a talented and versatile pitcher for the Boston Red Sox, for whom he has performed with distinction in several roles, including setup and closer; this year, he's expected to be in the starting rotation.

Funny how he never mentions baseball on the blog, though. It must be a real trick trying to find time for both. It's almost as if he's found a way to be in two places at once...

Wednesday, February 20, 2002

It seems that some folks are concerned that with Enron, the Republicans have all the business scandal action to themselves, and they really think the Democrats should have one too. In that spirit, they offer the Global Crossing mess.

There are similarities. Both are high-profile bankruptcies of large corporations. In both cases, politically connected individuals with ties to the company made money on the stock; in both cases there may have been revolving-door activity between government offices and the board. And of course, in both cases, there were hefty campaign contributions favoring one party --- in Global Crossing's case, the Democrats.

But there's one element of the Enron mess that the Democrats' would-be benefactors are having trouble finding in Global Crossing --- the, uh, payoff for the pay-offs. If you're going to talk about bribery, you should be able to find a quid to go with the quo.

The Enron case offers several, as I've written before: Enron got Bush to personally lobby on its behalf while he was governor of Texas; it also got exactly the government policy it wanted in areas crucial to its business, including the California energy crisis, which affected millions of people, and open access to state power grids. In that last case, when the chairman of the Federal Energy Regulatory Commission wouldn't go along with Ken Lay's policy, the chairman got bounced in favor of a Texas crony of Bush and Lay.

What do the Democrats' benefactors offer for comparison? The best I've seen so far (in fact, the only thing I've seen so far) is this:

Is anybody going to make the connection between Clinton's Secretary of Defense Bill Cohen, who now serves on the Global Crossing board, and the 'grease-skidded' award of a $400 million DOD contract that the Bush Administration canceled due to a faulty bidding process?

I don't want to minimize the seriousness of the accusations here. Surely, if true, this must be the first case of rigged bidding at the Pentagon to have been seen in modern times. But, sadly for the Democrats, their would-be benefactors overstate their case, starting with the value of the contract. The contract awarded was a three-year deal for $137 million, very roughly $40 million a year, which the government could renew, at its option, for another seven years. Only if the government chose to renew for all seven years would the company receive $400 million. (Even the initial $137 million was almost certainly not to be paid up front, but that's a detail).

To put these numbers in perspective, they would be a rounding error in the Pentagon's recent, remarkably generous ten-year lease of 767 airliners for use as tankers, which clocks in at $30 billion total, or $3 billion a year. This deal would be much cheaper if done as a straight purchase, not a lease, not least to avoid the conversion of the planes back to commercial configurations at the end of the lease at government expense. (It was, incidentally, pushed hard by Washington State's Democrat Senators and Representatives; personally, I'm with the Republican, McCain, who denounced it as "corporate wefare"). Or, if you like, you can compare the Global Crossing deal to the $2.4 billion cost of a single B-2 bomber, the plane that stains and can't fly in the rain.

There is, in short, less here than meets the eye.

Still, the folks who are looking into Global Crossing have a point, and it's good to see them acknowledge that close ties between government and industry can create problems --- problems which are only exacerbated by our current campaign finance system, as their focus on Global Crossing's campaign contributions seems meant to show. I look forward to their support and advocacy of proper reform to clean up the mess.

The Times of India reports that American C-130s are dropping hundred dollar bills over Afghanistan, inside envelopes with George Bush's face on them.

I understand that the domestic situation in Afghanistan is still a bit hot, but this seems like an uncharacteristic approach to the problem. It isn't like a Republican to try to solve a problem by throwing money at it.

It used to be that Delaware was the place that corporations maintained paper headquarters. But who wants to winter in Delaware?

The hot new health spot for the truly fashionable corporate maildrop is Bermuda, where your shareholder proxies and official correspondance can enjoy sandy beaches, palm trees waving in the breeze, and no corporate income tax. As the New York Times reports:

Kate Barton, an Ernst & Young tax partner, said that incorporating in Bermuda "is a megatrend we are seeing in the marketplace right now." Many corporations that are planning the move have not yet announced it, she said.

In a Webcast to clients, Ms. Barton cited patriotism as the only potentially troubling issue that corporations consider before moving to Bermuda, and she said that profits trumped patriotism.

"Is it the right time to be migrating a corporation's headquarters to an offshore location?" she asked. "And yet, that said, we are working through a lot of companies who feel that it is, that just the improvement on earnings is powerful enough that maybe the patriotism issue needs to take a back seat to that."

Well, at least they have to think about it.

But let's not get the impression that American companies aren't committed to American values. American companies are seeding Internet technology throughout China, for example, allowing for free communication. Or something like that...

Yahoo! was particularly eager to please. All Chinese chat rooms or discussion groups have a "big mama," a supervisor for a team of censors who wipe out politically incorrect comments in real time. Yahoo! handles things differently. If in the midst of a discussion you type, "We should have nationwide multiparty elections in China!!" no one else will react to your comment. How could they? It appears on your screen, but only you and Yahoo!'s big mama actually see your thought crime. After intercepting it and preventing its transmission, Mother Yahoo! then solicitously generates a friendly e-mail suggesting that you cool your rhetoric--censorship, but with a New Age nod to self-esteem.

Of course, Yahoo's not the only American company serving China's unique needs; Cisco sells custom-configured routers, with specially tweaked firewall software to make it easy for the government to meet its unique needs. Like preventing their citizens from reading such "politically sensitive websites" as CNN.

So this is how free markets promote freedom, and corporate America defends American values.

Greed is an American value, right?

(See also Joshua Marshall's and Ginger Stampley's takes on the Bermuda tax angle, and the Slashdot discussion of the Great Firewall of China).

Tuesday, February 19, 2002

And here's Republican finance in Massachusetts; desperate to hold the line on taxes, Governor Jane Swift is swinging the axe. One state office, for instance, is getting cut from 68 employees to five. The office in question investigates welfare fraud; its investigators recover about $100,000 a year for the state, and are paid only $54,000. (That doesn't count fraud which is caught before the state cuts a check).

Good thing we don't have a Democrat in the State House; imagine the effect on the State treasury if these people still got paid...

The Bush Administration doesn't like loose talk. From anybody. It's no surprise that they're withdrawing previously declassified documents, some going back as far as the 1940s, from public access. But they're going further:

For instance, the White House has asked the American Society of Microbiology, the world's largest group of germ professionals, based in Washington, to limit potentially dangerous information in the 11 journals it publishes, including Infection and Immunity, The Journal of Bacteriology and The Journal of Virology.

One White House proposal is to eliminate the sections of articles that give experimental details researchers from other laboratories would need to replicate the claimed results, helping to prove their validity.

"That takes apart the whole foundation of science," Ronald M. Atlas, president-elect of the society, said of omitting methods. "I've made it reasonably clear that we would object to anything that smacked of censorship. They're discussing it, and I wouldn't rule out them doing something."

He added that he was surprised by the number of his colleagues in academia who seemed willing to discuss publishing limits. "I think it undermines science," he said.

Nor are they fond of awkward inquiries; a journalist who recently made what should have been a routine FOIA request got his press credentials revoked; a DOJ officer is rumored to have openly bragged about that at a FOIA training seminar run by the DOJ.

But some people like to distribute subversive information. Like librarians. It's a good thing that the PATRIOT act limits the extent to which they can hide their activities.

(Links from Phil Agre's invaluable Red Rock Eater News Service).

Sunday, February 17, 2002

This is a really sick company:

This personal enrichment of Enron employees, however, was merely one aspect of a deeper and more serious problem. These partnerships---Chewco, LJM1, and LJM2--were used by Enron Management to enter into transactions that it could not, or would not, do with unrelated commercial entities. Many of the most significant transactions apparently were designed to accomplish favorable financial statement results, not to achieve bonafide economic objectives or to transfer risk. Some transactions were designed so that, had they followed applicable accounting rules, Enron could have kept assets and liabilities (especially debt) off of its balance sheet; but the transactions did not follow those rules.

Other transactions were implemented--improperly, we are informed by our accounting advisors--to offset losses. They allowed Enron to conceal ffrom the market very large losses resulting from Enron's merchant investments by creating an appearance that those investments were hedged--that is, that a third party was obligated to pay Enron the amount of those losses---when in fact that third party was simply an entity in which only Enron had a substantial economic stake. We believe these transactions resulted in Enron reporting earnings from the third quarter of 2000 through the third quarter of 2001 that were almost $1 billion higher than should have been reported.

Enron's original accounting treatment of the Chewco and LJM1 transactions that led to Enron's November 2001 restatement was clearly wrong, apparently the result of mistakes either in structuring the transactions or in basic accounting. In other cases, the accounting treatment was likely wrong, notwithstanding creative efforts to circumvent accounting principles through the complex structuring of transactions that lacked fundamental economic substance.

This is a really sick company, on Robert Musil's blog:

The Man Without Qualities continues to believe that it is unlikely that Enron's financial statements were deliberately, intentionally or obviously fraudulent. Of course, that is far from equivalent to asserting that those financial statements (in any form or as of any date) fairly reflect Enron's financial condition. But financial statements may fail to fairly reflect a company's financial condition out of mere negligence or inadvertent error or even good faith disagreement brought on by later experience and re-evaluation.


While such a change of industry-wide standards and opinions did not compel the Enron earnings restatements, a change in Arthur Andersen's opinion related to the then-ongoing rapid decline in Enron's stock price is reportedly exactly what caused Arthur Andersen to demand that Enron put its restatements into effect, and it is by no means necessary to impute fraud or deliberate deceit to account for them.

The first is from the Powers report, or more formally, the report of the Special Investigatory Committee of Enron's Board of Directors, which discusses all manner of financial irregularity at Enron. (It's 10 megabytes of PDF; Adobe's PDF-to-html converter is recommended for those with slow net connections). The second is from yet another Musil apologia for Enron.

Musil starts by noting that there are all sorts of legitimate reasons why a company might take a large charge to rectify its books. But the question at hand isn't why some company might take a charge, it's why Enron actually did. Yet Musil oddly never addresses the specifics of Enron's case.

They aren't hard to discover. Andersen CEO Joseph Berardino's testimony before the House Committee on Financial services has a readable, brief account of some, and there is a more detailed, still perfectly readable, discussion in this Washington Post article which I linked to two months ago.

Let's start with the charges discussed by Berardino. Briefly, Enron made numerous investments, many of which were turkeys, running losses and accumulating debt. To keep some of these turkeys from disfiguring its annual reports, Enron assigned them to another entity, nominally a joint partnership with other parties, named Chewco, for Chewbacca the Wookie. However, side deals with the partners left Enron holding the bag for just about all of the liabilities of the partnership (more than 97%).

So the liabilities of Chewco were, in effect, liabilities of Enron, and should have been carried as such on Enron's books. For about four years, they weren't, which means that Enron's financial statements over that period of time were simply in error.

Why the mistakes? According to Berardino, Andersen was apparently never told of the side deals which transferred almost all of Chewco's liabilities from Enron's partners back to Enron. Knowing failure to tell your auditors about legal agreements which materially affect your financial position is fraud. Enron's CFO, Andrew Fastow, knew first-hand about Chewco; as the Powers report describes, he was directly responsible for setting it up. Are we to believe that Fastow, recipient of CFO Magazine's 1999 Excellence Award for Capital Structure Management, didn't realize that this particular capital structure left Enron entirely on the hook?

(Berardino doesn't discuss another set of charges, covered by the Post article I mentioned above and the Powers report, in which Enron booked as assets, $1.2 billion in promissory notes from entities called the Raptors. The Raptors collapsed when the dotcom bubble popped, and the promissory notes became worthless. At that point the accountants looked things over and decided that since the Raptors were financed through complicated arrangements involving Enron stock, the notes never should have been booked as assets in the first place. But I digress --- back to the partnerships).

Why would partners participate in these deals? That's easy --- participants in Enron's partnership deals were handsomely rewarded. Individuals who participated as partners made millions of dollars, and seem to have incurred essentially no risk, as reported in the Powers report. If large banks were getting the same deal, they would certainly be happy to participate, something Musil seems awfully hung up on. The only parties at risk in a lot of these deals were apparently Enron and its shareholders --- but the banks that entered into Enron's partnerships, and their auditors, had no fiduciary duty to Enron. They were only interested in defending their own interests, and those of their clients, who seem to have made out fine.

(As a sidelight on Wall Street's willingness to engage in shady deals, today's New York Times reports that several banks engaged in derivative deals with Enron which "perfectly replicated loans"; at least one was actually booked as a loan by the bank, Credit Suisse First Boston. But Enron booked them as derivative deals, so they wouldn't show up on its balance sheet as debt, which would have damaged the company's all-important credit rating. Instead, they were reported as derivatives contracts, and financial analysts who inquired were told that the enormous increase in reported derivatives trading was related to "hedging activity". These transactions clearly allowed Enron to present a misleading picture of its financial state on its balance sheet --- but that didn't stop J.P. Morgan, Citigroup, or Credit Suisse from diving in).

Why would Enron's executives approve bogus partnership deals? Because they were among the beneficiaries. Michael Kopper was an Enron employee chosen by Fastow to manage Chewco. He received $2 million in fees for his trouble, according to the Powers report (and another $8 million for participation in some of Fastow's other partnership schemes). Fastow, the architect of these deals (and, once again, recipient of CFO Magazine's 1999 Excellence Award for Capital Structure Management --- read that piece, it's a howler) personally cleared in excess of $30 million from participation as a partner in several of these deals. The conflicts of interest here are stunning.

Beyond that, Enron's executives benefited indirectly from the misstatement of the company's financial condition, which inflated the stock price as they were busy selling shares --- Fastow personally cleared $30 million, Skilling $66 million, and Ken Lay cleared more than $100 million dollars in sales of inflated stock.

Sherron Watkins thinks that Ken Lay was uninformed about the particular deals that lead to the accounting irregularities, or at least, about their consequences. Another Enron employee demurs; where she sees innocent confusion, he sees malign spin, and as Skilling's lawyer notes, she sent a memo to Lay which suggested scapegoating Skilling, Fastow, and other subordinates, exactly as in her testimony.

But with regard to at least one of the partnership deals, he had oversight authority, and went through the motions of exercising it. He explicitly signed off on Fastow's participation in a partnership deal called LJM2, a cloak for, among other things, Enron's ill-advised purchase of unused, "dark", fiber-optic cable. The Powers report --- the official report of the board's own special investigatory committee on Enron's fiscal shenanigans --- acknowledges that Chewco, LJM, and several other dubious partnership deals, were also discussed and approved by the board. In fact, it's full of passages like this:

...the Board, having determined to allow the related-party transactions to proceed, did not give sufficient scrutiny to the information that was provided to it thereafter. While there was important information that appears to have been withheld from the Board, the annual reviews of LJM transactions by the Audit and Compliance Committee (and later also the Finance Committee) appear to have involved only brief presentations by Management (with Andersen present at the Audit Committee) and did not involve any meaningful examination of the nature or terms of the transactions. Moreover, even though Board Committee-mandated procedures required a review by the Compensation Committee of Fastow's compensation from the partnerships, neither the Board nor Senior Management asked Fastow for the amount of his LJM-related compensation until October 2001, after media reports focused on Fastow's role in LJM.

This doesn't even rise to the level of the Sergeant Schultz defense; they can't say "We knew nuffink, nuffink!" because the minutes of the board meetings disclose that they discussed and approved partnership deals which their own investigatory committee's report describes as highly improper. Instead, Enron's "high-quality board" (as Musil would have it) offers the pathetic excuse that management didn't tell them enough, and for some strange reason, they forgot to ask. Did the dog eat their homework?

And how convenient for them that all the real blame for Enron's troubles lies not with them, or their erstwhile confrère Mr. Lay, but with Skilling, Fastow, and others who are no longer with the company.

Fastow may have a different view of the board's involvement. If so, I'm sure we'll be hearing all about it shortly after he reaches his well-nigh inevitable plea bargain --- at which point, if not before, we may also learn the complete list of individuals involved in the partnerships, which was apparently not even available to the authors of the Powers report. But if the board wasn't complicit, they were clearly appallingly negligent.

So much for Musil's presumption of innocence. He goes on to spin more reasons for ignoring suspicious behavior of Enron and Andersen, ignoring relevant facts as usual:

Nor should anyone consider Enron's termination of Arthur Andersen following Enron's bankruptcy to be significant evidence of malfeasance by either Enron or Arthur Andersen. It is neither sinister nor at all unusual for a bankrupt company to terminate its pre-bankruptcy accountants, if only to assure creditors and investors that a new boom has been brought in.

Enron's own press release quotes Ken Lay as saying that Andersen is being dismissed for malfeasance, "including the reported destruction of documents by Andersen personnel." It's almost as if Musil doesn't think Ken Lay's word can be trusted.

Musil winds up with a truly bizarre rant about the Andersen shredding party: it wasn't that serious, though it certainly did justify firing the partner responsible, though on the third hand, it's hard to assess, since we don't actually know what was on the documents that were shredded. (Well, duh. That's why they were shredded).

Musil has denounced the New York Times' coverage of Enron as "hysterical". Yet he writes as if he is ignorant of facts that have been well covered by all sorts of national news outlets, including the Times, which has certainly been all over the story. In particular, he keeps on trying to argue that there was no major financial irregularity at Enron, even after the release of the Powers report, written by members of Enron's own "high-quality" board, which unabashedly states that Enron's books were cooked, and that employees of its finance department, right up to the CFO, were raiding the till. Perhaps the Times is owed an apology?

Update: In his latest entry, Musil has finally taken notice of the Powers report. He still doesn't seem to have read the thing itself, though; instead, he trolls for exculpatory remarks from an article in the Washington Post --- one which isn't even so much about the report, as Ken Lay's failure to testify. Musil crows happily, for instance, over a quote from Professor Donald Langevoort of Georgetown, to the effect that the report is soft on Lay and Skilling. But here are a few quotes from the same Washington Post article which Musil omits:

The [Powers] committee investigated only a handful of the more than 1,000 partnerships Enron established and found that Enron executives manipulated the company's financial condition in several transactions with these partnerships. The committee said some partnerships hid losses from troubled Enron deals, including investments at power plants in Brazil and Poland, and in companies such as Internet service provider Rhythms NetConnections Inc. and networking equipment maker Avici Systems. Deals were done to make the company appear profitable when it was actually losing money and heavily in debt. At the same time, insiders made hundreds of millions of dollars in the sale of Enron stock, at the expense of employees and shareholders.

Lay was portrayed in the report as a lax manager who "bears significant responsibility for those flawed decisions" to create off-the-books partnerships and let others run them.

And again:

Columbia University law professor John C. Coffee said the report lays the groundwork for "an old-fashioned, plain-vanilla fraud case against Kopper and Fastow."

"I think this is going to significantly enhance the prospect of criminal indictments in their cases," Coffee said. If the facts stated in the report are true, "this is into the zone of active fraud," he said.

And again:

The board's attorney, Neil Eggleston, focused on the report's assessment that some information was withheld from directors.

"The board and its committees were repeatedly assured that the controls the board had ordered were adequate and being implemented, but the board was misled," he said.

The Powers report is indeed measured in its discussion of Lay and Skilling, to the extent that it tries to portray them, like the Board itself, as dupes of Fastow. But it is very, very hard on the rest of the company's management, particularly the finance department. Suggestions to the contrary just won't wash.

So much for quoting out of context. Musil also seizes with glee on the Times' acknowledgment that the disguised loans it reported on Sunday did not violate current FASB rules, never mind their deceptive intent. He somehow neglects to mention that those rules are about to change, as disclosed in the very next sentence in the Times article after the one he cites; in the future, any such transaction will have to be reported honestly, as a loan.

Think of it --- Enron's management was actually capable of rigging a deal that didn't violate FASB rules! I guess after Chewco, that's good to know.

More news from Boston ---the headline says it all: "Hub (i.e. Boston) FBI agents likely helped hit man kill again".

The hit man, one Vinnie ("The Animal") Barboza, was in the witness protection program at the time of these murders, after having used his own perjured testimony, with the connivance of the FBI, to put an innocent man named Joe Salvati in jail for one of his earlier killings.

This comes from a Congressional panel which is looking into the matter. They'd obviously like to see the FBI's records in the matter, but Ashcroft, last I heard, wouldn't cough them up, claiming executive privilege.