Friday, April 12, 2002

If you want to keep your faith in the probity of what goes on in Wall Street, then by all means avoid reading the thirty-page affadavit of New York AG Eliot Spitzer describing what his staff found in email they seized from the Merrill Lynch internet group, describing massive conflicts of interest in the group. The emails show the group was particularly focused on touting stocks of companies that Merrill itself was dealing with, particularly its investment banking clients; in private, analysts described the same stocks in stark terms, "crap" being on the mild side. Merrill itself claims that the remarks quoted were "taken out of context." Figuring out the context in which people issuing honest recommendations, completely independent of the firm's investment banking activities, nevertheless opine that

the whole idea that we are independent from banking is a big lie


We are losing people money and I don't like it. John and Mary Smith are losing their retirement because we don't want Todd [Tappin, CFO of] to be mad at us.

is left as an exercise for the interested reader.

Interestingly, at least one blogger with some reputation as a financial expert has argued that Enron's notorious partnerships can't be such a big deal because large Wall Street firms like Merrill were involved, and they couldn't possibly be involved in shady dealings. (Sure, Michael Milken's escapades at Drexel Burnham got him personally slapped with a $600 million fine, and Ivan Boesky got a $100 million fine and jail time --- but that was the '80s. Evil has not been seen, heard or spoken on Wall Street since). And even though Enron's current CEO has long since acknowledged that jail time is likely for some of the principals, this guy's still at it, throwing mud at the plaintiffs' lawyers in the Enron shareholder lawsuits.

There's more to be said about Enron, of course. Like its incredible shrinking trading book --- the value of the deals secured by the trading operation which was once touted as the beating heart of the business, which was estimated at $12 billion last fall before the abortive merger talks with Dynergy, $7 billion after, and more recently in January, just $1.3 billion.

All of these figures, including the last, are guesses --- specifically, guesses about how much money Enron will actually receive on net for transactions it committed to some time ago, but which were, and are still, in the future. Enron's "mark to market" accounting required traders to project prices forward years in the future so they could make these guesses (the genteel word is "estimates") of the future cash flow stemming from the contracts, which Enron then booked immediately as revenue. So Enron's revenue in the current quarter (say, 3Q 1999) was directly affected by its traders' guesses about what prices would be years in the future --- on the "price curve", in the parlance of the trade. But far enough in the future, almost any guess can be made to seem plausible. And sure enough:

Some traders took advantage of this subjectivity to set unreasonably high curves, and later to change those curves to establish even higher values, which they could report as profits immediately, a former manager on the trading desk said.

"The curve moved constantly," this manager added, "especially toward the end of the quarter, to generate reported income."

Other executives note that Jeff Skilling, while head of Enron's trading operation, liked this sort of thing, specifically encouraging a form of the practice called "blend and extend". It's also noteworthy that there really were guesses involved; the deals were on Enron's books as "open", meaning that Enron would need to make new deals to cover its commitments or realize its gains --- gains which had already been booked as revenue. We're not talking accounts receivable here.

In general "mark-to-market" accounting can be defensible, in stable markets for liquid commodities. And in fact, trading operations like Enron's are often defended with the claim that they promote price stability. So there's something peculiar about the people involved in those operations continually placing ever-higher bets on the future prices of the commodities they trade.

But beyond that, consider what this means for Enron as a whole. Last year at this time, its public face was as a trading colossus. It had started out by applying financial wizardry to energy trading in America, but that was only the beginning. It had branched out, both engaging in energy projects overseas (the Dhabol project in India being one famous example), and moving into new areas of business, like its highly touted broadband trading venture. And when news of Enron's troubles first broke, it was possible to question whether such a large, important (and, it must be said, politically connected) firm could really be involved in shady dealings.

Well, all that other stuff has fallen apart and fallen away. The broadband trading desk, it turns out, never traded much, and lost money on what it did (a lot of which were "lazy susan" deals and similar chicanery). Most of the overseas deals were likewise huge money-losers; in fact, the notorious LJM partnerships seem to have been largely used as a mechanism for keeping the losses from broadband and foreign operations off Enron's own balance sheet. But through it all, the corporation's defenders could say that whatever else was going on, at least the core energy trading operation was soundly conceived and profitable. If that wasn't the case, you have to wonder; through the boom of the late '90s, was Enron ever engaged in much legitimate, profitable business?

Thursday, April 11, 2002

Joshua Marshall is again today going on about polling in the Bush administration --- he's been all over the subject for two weeks and he's still shocked, shocked! that Bush is spending substantial amounts of money on polls, and pursuing the actual amount spent with great alacrity, as if it really mattered whether it's slightly over $1 million, or not too much under.

I don't get it.

This story started with a Washington Monthly piece by Joshua Green, which compared Bush's use of pollsters in these terms to Clinton's:

... while Clinton used polling to craft popular policies, Bush uses polling to spin unpopular ones---arguably a much more cynical undertaking.

Which could, of course, be spun back right the other way: while Bush tries to find the best way to sell policies which he thinks are right for the country, Clinton cynically casts about for policies that would be easy to sell. And there's at least as much truth to the pro-Bush spin, in this case. Do Marshall and Green really expect politicians in a democracy not to care what the public thinks, or not to pay to find out? Trying to play philosopher-king just doesn't work, as Hillary Clinton found out the hard way with her disastrous health-care initiative.

It's not as if I've been any particular friend of the Bush administration, but complaining that it's "cynical" for them to even hire a pollster is naive. And complaining about remarks from Bush administration officials, including Bush himself, which soft-pedal and downplay the use of polls (even though they do in fact use them) isn't much better; to some extent, they're just acknowledging the difference Green pointed out.

So, it really doesn't make sense to go after Bush for cynicism in his use of polls. If you want to find cynicism in the Bush administration you have to look elsewhere.

It's not as if you have to look far. Look at his protectionist tariffs on steel and textiles, which are in fact craven pandering to small groups of swing voters, and were advocated as such in cabinet meetings by his own trade representative. Or his energy policy process, in which energy industry groups were consulted extensively, and their recommendations were allowed to dictate administration policy, but a single no-name staffer was given less than forty-eight hours to telephone eleven different environmental groups, survey their policy proposals, and identify "some we might like to support that are consistent with the administration energy statements to date".

That's cynicism. Polling is just smart.

It's no secret why the Bush administration keeps its polling data, and the use of it, quiet: talk about polling is a kind of political inside baseball which is intensely boring to anyone outside the beltway. If it gets in the middle of your sales pitch, you won't make the sale, so you don't want to be talking about polls in public. And you don't want anyone else to be either, so you take steps to minimize leaks. In declaring one of Bush's statements denigrating polling the "Whopper of the Week" (ironically enough, one completely consistent with Green's thesis quoted above), Slate declared that "poll-taking polls badly". That's not quite right; what polls badly is talking about polls, not using them --- something Bush's opponents might want to consider before talking too much about his polling.

(Update: Avedon Carol points out this column from Mark Shields, which lists a few of the things that Bush's opponents should be talking about.)

(Further update: Charles Kuffner quotes Green quoting Bush to the effect that "he governs 'based on principle and not polling or focus groups'", and then asks:

They made a big deal about not using polls when in fact they do use polls and go to some trouble to hide that fact. What would you call that if not cynical?

But by even Green's account, they don't use polls to govern; they use them to spin. If Bush's critics have lost sight of the difference between spin and governance, that's their problem, not Bush's. What's cynicism on the part of the Bush crowd is when, having made that statement, they then do govern based on polls --- which was pretty clearly the case in their trade policy. But simply hiring a pollster is not a cynical act. Does anyone think that politicians in a democracy are supposed to just not care what the public thinks?)

Wednesday, April 10, 2002

Two interesting posts from other blogs on the mideast.

First, this long essay from Jim Henley on, among other things, the ways that Israeli settlement policy has acted to vitiate the "two-state solution" which Israel agreed on at Oslo, by leaving any potential Palestinian state with essentially no territorial integrity. It's a point well taken, particularly since one of the architects of that policy was Ariel Sharon. One quibble; Jim's right to say that

All the defensive blather about how really the Palestinians have it much worse in Arab countries does not mean that they do not, in an absolute sense, have it bad in the West Bank and Gaza.

However, there are two reasons to raise the point other than defending Israel. First, it sheds light on the true motives of the "support" the Palestinians get from their Arab brethren, which isn't to improve their lot, but rather to preserve their squalor as a casus belli.

Second, the existence of the refugee camps for a separate population of "Palestinian Arabs" within Arab states is itself a historical anomaly. Historically, Arabian nationalism has been pan-Arab; the current Arab states in the region and their borders are to a great extent colonial artifacts, which are seen by the Arab themselves as fragments of the historic caliphate, and even recent history has seen repeated attempts to put Humpty Dumpty back together (like the United Arab Republic which for a brief time united Egypt and Syria). And there was certainly no "Palestinian nation" before 1948; if the Arabs there identified with any Arab state at all before that time, it was Syria.

So, Palestinian nationalism is itself a fact that the Arab governments have created for political purposes, much as the Israeli annexationists are trying to "create facts" with the settlements. But, at this point, it's a fact regardless, which Israel has acknowledged as such at Oslo. Much as the annexationists would like to contest it, it's probably too late now.

One other comment on a blog-commentator. Steven den Beste is among several who are pushing the line that Bush's speech of last week didn't really call upon Israel to withdraw, at least not until they had finished everything that they were going to do anyway, but was meant solely to provide "diplomatic cover" for continued Israeli operations. The most charitable thing to say about this interpretation (which persists despite repeated statements from Colin Powell, Condi Rice, and Bush himself that the speech shouldn't be "parsed" in this way, and that "without delay" means just that) is that the diplomatic cover operation has failed; diplomatic protests against Israeli operations have gotten ever more shrill regardless.

What we're left with is a situation in which Bush is widely seen to have requested an immediate withdrawal, and the Israelis are widely seen to be ignoring him, particularly after Sharon's recent speech to Parliament, which in effect said "we'll be done when we're done". The US just ends up looking foolish.

Tuesday, April 09, 2002

Well, Boston has managed once again to make itself the center of a national scandal; our archdiocese has been caught having shuffled yet another priest from parish to parish despite repeated allegations of sexual abuse, some of which were settled with cash and the broken promise that the guy would never prey on children again. The difference this time is that Cardinal Law was personally involved in shielding Paul Shanley, despite having been personally informed of medical evaluations saying that he was "sick", and despite public speeches from Shanley himself which offered support and praise for sexual relations between children, particularly boys, and men.

The response from the archdiocese was a four-page statement from a PR person, which acknowledged that "policies and procedures of the past" were "inadequate", but made no specific mention at all of the disclosures concerning Shanley, and stressed that "Whatever may have occurred in the past, there were no deliberate decisions to put children at risk." (Gee, does that mean you're conceding depraved indifference?) That came from a PR flack --- Cardinal Law, who called down the wrath of God on the media for having the effrontery to actually cover the story of an earlier scandal, has long since stopped talking to them, and since the current round of scandals broke, he's also stopped taking questions from parishoners after Mass.

And yet, the international church still can't seem to take the problem seriously; it sees the problem as evidence of some sort of peculiar hang-up that Americans have about sex (or perhaps English-speakers generally, given the troubles of the church in Ireland), since the Catholic church itself, of course, has no sexual hangups of its own; at a recent press conference, one European cardinal described it as "an X-ray of the problem" that most of the questions on it were in English.

And the hierarchy don't want to bother themselves with the parochial concerns of Americans or anglophones, since they see the future of their church not in the anglosphere, but rather in Africa and Latin America, where the problems of the church are altogether different. There, the priests are accused of raping nuns.

Monday, April 08, 2002

The movie studios want to protect their future, by controlling the customers, hence the Citizens Be Damned Time-Warner Protection Act. But they can't force people to spend money for a lousy product. They might want to look to that as well, if this Frontline story is any indication:

"What's interesting about the business," says Richard Natale, a reporter for The Los Angeles Times , "is that it's no longer the movie business. Essentially, people don't make movies anymore. They make spectaculars. ... The reason we went to see 'Casablanca,' or even 'Jaws,' was because the story was really fascinating. The characters were compelling. We sat and ate our popcorn, we sat on the edge of our seats, we cried, we tore our hair out. ... We don't do that anymore at movies. It happens less and less. We go to movies to be bombarded."

Even the "Indy" film companies are increasingly masks for the same corporate crud; an art-house facade on corporate product:

"Miramax showed you could make a $100 million art-house movie," film critic Elvis Mitchell tells FRONTLINE. "And what that said to the studios was that, 'Oh, if we pretend we're in the art-house business, the independent business, then we can co-opt that money, too.'"

What are they promoting most heavily these days --- Sorority Guys? The Internet will not kill them. Lousy product might.

Arthur Waldron thinks that boosters of the Chinese economy have been fooled:

According to the Financial Times of London, Chinese Premier Zhu Rongji recently told a television audience in his country that the Chinese economy would have "collapsed" in 1998 without the state stimulus spending that is currently taking Beijing's government debt to record-high levels. Zhu Rongji is someone who chooses his words carefully, which makes the term "collapse" alarming, although not perhaps, in retrospect, surprising.

Officially, China has for some time been claiming growth rates of 7 percent or more. But information casting doubt on those figures has long been available. Visitors see lots of rural people camped out at urban railroad stations or on sidewalks: Clearly they have nothing to do where they come from, or where they have arrived. Block after block of abandoned construction projects in cities suggest someone has run out of money (as does the recent proposal that money be raised for the Three Gorges Dam by selling stock). Almost daily protests by workers, many violent, are also a clue that all is not well. Moreover, even the official figures don't make sense: How can it be that energy use is falling in a booming economy? And unemployment rising (as the official statistics show)? This is unprecedented in economic history. Finally, the state borrowing for pump priming to which Premier Zhu refers has always been public knowledge. Why, if the economy is burning up the track, has stimulus been necessary?

Once again Chinese officialdom has put one over on Western observerdom.

Can nothing you read about China be believed? Waldron cites

the chronic pathologies of China watchers: groupthink (in the academy and government), fear of Chinese reaction, job pressure (in the intelligence community and the media) and greed and wishful thinking (in the case of business). Once again, we look like gullible fools to the Chinese.

To which we can add another item: fear of direct reprisals from the Chinese government, and those beholden to it. It costs money to read Perry Link's chilling article on this subject from the New York Review, but it's very much worth it.

It's absolutely routine for visiting scholars to be invited to "chat" with the police about the possibility of future visits to China, and the welfare of their friends and relatives. The threatening intent is clear, but no one talks about it; in fact, returnees are specifically warned to "preserve the image of State Security" by holding their tongues.

When scholars don't take the hints, the government is in the habit of rounding them up (including visitors with permanent residency in the United States) whence they find themselves mired in a Kafkaesque legal process where they are accused of crimes somehow involving unauthorized disclosure of information, but the nature of those offenses is deliberately not made clear. This vagueness serves several deliberate purposes, the most important of which is to keep everyone guessing about what the limits of correct behavior actually are, and to encourage scholars to play it safe. Very safe. Link describes one American scholar who recently canceled a research trip to China for fear that while in the country, she might stumble over some political tripwire. Her work is on the Tang dynasty, 618-907 CE.

Even large American corporations are not immune to this sort of intimidation; when the Chinese government imprisoned Li Shaomin, an American citizen teaching at the City University of Hong Kong, for "espionage", his former colleagues at AT&T (where he had worked for seven years) asked the company to help support his cause, and received a brief reply from the PR department saying that it was "not appropriate for AT&T to take an active role in publicizing" the case.

And they take the exact same approach with people who are doing or promoting business in China. One Chinese-American lawyer, Gordon Chang, has become known as a critic of both the regime and Westerners who, by his account, boost the Chinese economy cheerfully in public forums while describing it in private as corrupt, lawless, and mired in bad debt and bad deals. While writing a book on the subject, he had to retire from a pretty high-flying legal career (including two terms as a trustee of Cornell), claiming:

I would not be able to practice in a major firm ... I know many lawyers, fine and upstanding individuals otherwise, who refuse to utter a critical word about the regime except in private conversation. I know that they would not hire me now ...

(Here's a precis of Chang's views; it's pretty harsh. Among other things, he claims that many of China's industries are already drowning in overcapacity, and that the state of the peasantry, mostly hidden from Western observers, is pretty dire).

In describing Waldron's piece, Brink Lindsey notes that

China's [purported] remarkable growth over the past couple of decades has become the Communist Party's primary continuing claim to legitimacy. If the economy is sputtering, the last major prop of Communist rule may be wobbling. If the economy ever nosedives, bet on political turmoil.

Either that, or when the people get too restless to be distracted by these bogus claims, the regime will find something else to distract them with. Like that old standby, beloved of despots everywhere, the patriotic war...

(Now then, what was Joshua Marshall writing about the uprightness and competence of the Bush administration's East Asia diplomats?)