Friday, August 30, 2002

Chad Orzel suggests, anent Bjorn Lomborg's critique of environmental activism, finding the middle ground in the debate over the Kyoto treaty on CO2 greenhouse gas reduction:

The real problem, though, is a failure to negotiate. Kyoto's too much for the business community to take? Fine-- make a counter-offer. Pick some level of CO2 emissions that you think can be met with a reasonable expense, and let's do that. That's not enough for the environmentalists? Anything's better than nothing, which is what you're going to get if you insist on Kyoto or nothing...

Which seems perfectly reasonable, except that Lomborg's critique of the Kyoto treaty is that full implementation would do so little to actually reduce CO2 emissions that its effects would barely be measurable, and hardly enough to have any real effect:

The effect of the Kyoto Protocol on the climate would be minuscule, even if it were implemented in full. A model by Tom Wigley, one of the main authors of the reports of the UN Climate Change Panel, shows how an expected temperature increase of 2.1?C in 2100 would be diminished by the treaty to an increase of 1.9?C instead. Or, to put it another way, the temperature increase that the planet would have experienced in 2094 would be postponed to 2100.

Orzel suggests doing environmentalists should compromise on a treaty that does even less. Exactly how would this be worthwhile?

Thursday, August 29, 2002

There's been a lot of recent comment in the blogsphere about Yahoo's cooperation with Chinese censorship, which seems to show that American companies don't believe much in American values like the free press.

That same disrespect seems to extend companies in the free press itself --- witness this Safire column on the craven cave-in of Bloomberg news, when they found to their horror that one of their columnists had honestly reported on obvious nepotism in Singapore...

Well, it seems to be ethical conflicts week here on the other side of the Looking Glass.

Along those lines, here's more news from Boston: the church has responded to the Boston Herald's front-pager which I pointed out a couple of days ago.

Taking the story from the top: this spring, the church announced a settlement in the $30-$40 million range with the victims of one deviant priest, John Geoghan, and then pulled back at the eleventh hour, after a finance board refused to approve the deal, saying it would leave no cash in the till to compensate the victims of other priests --- thus exercising a veto power which the attorneys for the victims had never been informed of, which had not been mentioned in coverage of the matter in even the church's own newspaper, and which it had not otherwise exercised, as far as anyone can recall, ever. The victims' attorneys are presently in court trying to hold the church to the settlement, claiming, in effect, that they were negotiating with the archbishop, who had sole authority to dispose of the church's resources, and when he said they had a deal, they had a deal.

In the middle of these hearings, the Boston Herald had a fairly simple question: what resources does the church (often described as "land-rich and cash-poor") have that could easily be used to pay the victims? A quick search of title deeds found $160 million in property which was being used for no church-related purpose at all --- one building, for instance, was being rented to a spice company. (And that doesn't count the other portions of the church's property which are being used, but could be given up without undue sacrifice --- like the Cardinal's palatial residence, and the adjacent seminary, which is nearly vacant; the whole parcel has a ready buyer in Boston College, a separate Catholic institution, but one which has the money and needs the space).

To which the church yesterday responds, through the woman with the worst job in Boston right now, its spokesman, Donna Morrissey:

The church in Boston exists in the spheres of both civil and canon law. While under civil law, the properties are listed as Roman Catholic Archbishop of Boston, a corporate sole, under canon law local parishes own the vast majority of the properties listed in the Boston Herald. These properties, and parcels, are parish assets and revenue derived from the rental or sale of those assets is used to sustain the parish operations or capital needs.

But, the law doesn't allow parties to evade judgment just by adopting rules which don't allow them to comply, even if they take the overt form of religious bodies. It's not legal for Rastafarians to smoke pot in the United States just because it happens to be one of their sacraments. (Catholic canon law experts cited by the Herald today make the same point, that canon law defers to civil law in civil matters). The effect is as if McDonald's had responded to the much-misunderstood scalding-coffee verdict by saying that:

McDonald's exists in the spheres of both civil and McDonaldLand law. While under civil law, its cash assets are treated as property of the McDonalds corporation, incorporated in Delaware, under McDonaldLand law, they are entirely under the control of the Hamburglar, and so we cannot use them to pay off civil judgments against food establishments which are the responsibility of Mayor McCheese.

The difference, of course, is that McDonald's isn't in the business of offering ethical guidance.

And still more news from Boston: A local icon is in trouble.

Jim Koch's reedy voice has been a fixture of Boston radio ads for years, touting the quality of the ingredients in his company's Sam Adams brews. But trips across the German countryside searching the fields for the very best hops aren't exactly what appeal to the young, sharp-dressing, party-going set which buys a lot of beer, so his ad execs have been trying to give the brand a new, sharper, more radical image in the worst way possible.

Which they achieved, by making the company a semi-official sponsor, for three straight years, of the "Sex for Sam" competition on the Opie and Anthony radio show, in which couples were enlisted to have sex in public and embarrassing locations, in return for beer and concert tickets.

Is this starting to sound familiar?

Koch was actually in the studio when Opie and Anthony broadcast the segment that got them fired, in which two "sex for Sam" contestants did, well, something indecent in Saint Patrick's Cathedral (they claim they were faking it), despite which he has been trying to spin out apologies which disclaim any knowledge of the nature of the contest.

Meanwhile, back home in Boston, the local bartenders are of the opinion that the Catholic church is suffering enough indignities right now that they shouldn't have more gratuitously heaped on them, which is leading to a sharp, radical boycott, at least until Koch issues an apology which someone might believe.

Wednesday, August 28, 2002

People on Wall Street treat legal and ethical issues with remarkable delicacy.

For instance: while Bernard Ebbers's Worldcom was on the manic corporate buying spree that ultimately wound up in bankruptcy, investment banks competed mightily for Worldcom's lucrative business. At about the same time, for some strange reason, Salomon Smith Barney let Ebbers buy large numbers of shares in its hottest initial public offerings at the opening price, which Ebbers could instantly sell (in the then-guaranteed post-IPO runup) for millions of dollars in profit. Also on the gift list were six other Worldcom directors and officers, including now-disgraced CFO Scott Sullivan, the man who taught the world why you should not treat ongoing maintenance as a capital expense.

To some of us, these favors might look like bribes. But we're not treating the matter with sufficient delicacy. Professionals take a more nuanced approach --- say, Lewis Lowenfels, a securities law expert at the New York law firm of Tolins and Lowenfels:

There's nothing wrong with favoring your best customers. But when you see a pattern of this coupled with the magnitude of it at the same time that the individual's company is paying substantial investment banking fees to the underwriter, it has to raise questions of whether there was a quid pro quo. If there was, then federal securities laws may well have been violated.

Strangely, the violation involves just a "failure to disclose to investors that significant numbers of shares were being allocated to executives of large clients" --- which was true whether there was a "quid pro quo" or not. But nevertheless, let's just take it on Lowenfels' authority that the violation depends on whether there was a quid pro quo.

Now, what does this mean? Lowenfels knows about the IPO shares. He also knows that Worldcom was doing a lot of mergers and acquisitions, and that Salomon had a busy M&A practice which was heavily involved in the telecom industry. Yet he still thinks there are only "questions" about whether there was a quid pro quo. But what's left to question? Only whether there is specific evidence tying some particular quid to some particular quo.

So if Salomon was giving Ebbers hot IPO shares under the table in return for getting cut in on some particular deal, that would be wrong. But if Salomon was giving Ebbers the shares in the general expectation that it would help them get cut in on the next few of Worldcom's endless stream of acquisitions, well, that's just fine --- "there's nothing wrong with favoring your best customers".

Or, to put it another way: an illegal quid pro quo is only illegal if somebody is stupid enough to write down the particulars. Otherwise, there's nothing at all wrong with it.

Which is an object lesson in the distinction between legal ethics and the other kind...

Update: In Slate, Daniel Gross has another explanation of the issue that Lowenfels may have been getting at --- it's not wrong to send kickbacks to customers that drum up a lot of business, so goes the argument, so long as the right party gets the kickback:

If it's ethical for big-spending clients to receive outsized chunks of IPOs, then it is WorldCom—not Ebbers—that should have received all those shares and then flipped them for a quick profit.

But that's again a distinction without much difference. As Gross notes in the preceding sentence, Ebbers "regarded the company as his personal piggy bank."

Tuesday, August 27, 2002

For all my grousing, the libertarian critique of government regulation occasionally has its merits. Take, for instance, the matter of water supply. A complicated morass of legislative compacts and regulatory understandings has led to a situation in which residents of Los Angeles can pay up to $600.00 for an acre-foot of Colorado River water, while agribusiness pays only $13.00 per acre-foot. The result is a massive subsidy of thoroughly inefficient use of natural resources (as a friend of mine once quipped, "Hey, I've got a great idea --- let's grow rice in the desert!"), sustained entirely by cronyism and lobbying.

Naturally, our friends from the Chicago school see privatization as a solution to this problem. (They see it as the solution to every problem). And indeed, they are getting some water delivery systems privatized. But not for Colorado water --- the wave of privatization is hitting the third world, where the World Bank is using its enormous influence to pressure governments into selling off their water delivery systems, resulting in complaints that the contractors systematicly underbid in order to demonstrate fictitious "benefits" of privatization, and then raise prices within their districts (which are natural monopolies --- there's only one set of pipes, which they control) to punishing levels simply because they can:

"We kept presenting facts showing that they were not making any investments, just raising the price of water. And any investments they made were with government money."

On the one hand, we have massive, encrusted regulation, with the water controlled largely by government; on the other, privatization and thorough deregulation. What these two situations have in common is that in each case, government influence has structured the situation so that large corporations get major benefits at the expense of the little guy.

The libertarian critique of government power frequently has its merits. Where they fall down is in failing to see the power of large multinational corporations as the other side of the same coin.

Found while searching for the water story above: It turns out that rodents in the New York City subway are not entirely a bad thing. They have created an ecological niche for the Fulton Street subway cat.
More news from Boston: I haven't wanted to comment on each new episode in the sexual abuse scandals in the Catholic church because, after a while, it's all just more of the same.

Every once in a while, though, there's something different. The church is trying very hard to wriggle out of a $30 million settlement which it announced that it had agreed to earlier with the victims of one particular priest, John Geoghan. They claim, in particular, that the settlement would exhaust their available financial resources, and leave them with no money to compensate the victims of all the other priests.

But a simple search of title deeds in towns within the Boston Archdiocese turns up $160 million dollars' worth of property which is not being used for any church-related purpose --- including quite a few office buildings. And the property might well go for much more than its assessed value if sold in the current market.

So far, the archdiocese has no comment...

Monday, August 26, 2002

A keynote of libertarian philosophy is the rationality of the market. Here's an example of how that works in practice.

During the dotcom boom, a company called Liquid Audio had an IPO. Even though it had no viable business model, the market thought it was rational to buy the stock, and the IPO was a huge success, leaving the company with a gigantic cash hoard.

After the dotcom boom came the dotcom bust, when the market thought it was rational to sell dotcom stocks. And since Liquid Audio was such a stock, its stock price cratered --- indeed, to the point that the market is now valuing the company at less than the value of its remaining cash on hand.

A few stockholders have noticed, and since the company still has no viable business model, they are now trying to break the company up and pocket the cash. Which may be the first investment decision related to this company which has ever made sense.

Warren Buffett once famously commented that "Any player unaware of the fool in the market probably is the fool in the market." How do all those fools arrive in the market? American Enterprise Institute resident scholar John Makin blames hype from, among others, greedy brokers, fad-following journalists, foolish academics, and the two AEI colleagues of his who wrote the now-infamous "Dow 36,000". Much of what Makin has to say is smart and well-taken, though his opening complaint that stock funds put all their money in (gasp!) stocks is just bizarre --- if you want a fund that invests in bonds, and you probably do, buy a bond fund. But which of the brokers, reporters, profs, and AEI drones were responsible for all the professional venture capitalists who jump-started the Liquid Audios of the world in the first place?

(Links via Slashdot and Ethel).

More news from Boston: the Big Dig highway project let the public walk through a nearly-finished stretch of highway tunnel yesterday.

The project has two major northward water crossings. One, open for a few years now, is known as the Ted Williams tunnel. A sign up on the wall identified the other as the "Bukner Hill bridge", an apparent attempt to commemorate another Red Sox player, Bill Buckner, who Red Sox nation will remember less fondly, but just as long.

For what it's worth, the name actually fits with the architecture of the bridge, which features two large concrete towers in the form, from the roadway up, of an inverted "Y". Tens of thousands of cars a day will go right between their legs...

Sunday, August 25, 2002

I didn't say a whole lot about the Brendan Nyhan vs. MWO flap, in part because some things are so silly on their own that they are hard to mock --- as, for instance, suggesting that right-wing liars like Coulter and Limbaugh, and a web site that exposes their lies, are morally equivalent because they both use strong language.

Strong language can be useful even when it's not explicitly partisan, as for instance, when Daniel Davies talks about economics:

The American consumer is pretty much all that's holding up the entire world economy at the moment. This is because final demand has to come from investment or consumption, and nobody appears to be in the mood to invest. Meanwhile, the Japanese don't care to (deflation and recession), the Europeans don't dare to (an ECB more worried about credibility than sensible anticyclical monetary policy), so mad dogs and Americans have to go down to the shopping mall.

Which wouldn't be a problem, except that, as far as we can tell, the American consumer is basically only still spending because he thinks that magic beans grown on the Internet will pay for everything. The strong suspicion is that when the Yanks look under the bed and discover that all of their magic Internet stock market money has turned back into rotting leaves, they're going to feel a little bit embarrased (and broke), and stop buying goods from Asia with money borrowed from Europe, a process which doesn't look like it would be enough to keep the world going but in fact is. And given that the stock market's been performing pretty badly these days, and is beginning to appear on the cover of USA today, lots of people are beginning to worry that the day of reckoning might be at hand. Which would obviously, leave us in the shit.

This is the doctrine of the "wealth effect", and if you can dig up a few factoids and linear regressions to illustrate it and avoid using the word "shit", you can make a quite decent living as a pundit by repeating the paragraph above. ...

And now, from the sublime to the ridiculous. Every time I comment on Robert Musil's latest Enron fantasy, as surely as night follows day, there quickly comes an enraged response, jam packed with even more egregious nonsense. It's half the fun. Since this time, for a change, he's deigned to link to the post to which he's responding, I should probably comment.

As usual, he's got a lot to say, much of it deceptive at best. Starting with this:

Mr. Kopper's guilty plea is quite clearly based on events entirely unknown to Enron's critics at the time of its bankruptcy filing.

Kopper's plea is based on his role in several sleazy partnership deals, most of which, particularly Chewco (which Kopper managed) are described in meticulous detail in the Powers Report, the Enron board's official report on the shenanigans. The Powers report details Kopper's roles in the Chewco and LJM deals, and makes a specific note of the multimillion-dollar "unauthorized and unjustifiable financial windfall" which Kopper's dealings secured for him, at the company's expense. The Powers report wasn't released at the time of the bankruptcy filing, but it has been public since February, and for most of that time, Musil has been abjectly in denial about the pattern of fraud and misconduct which it reveals, which goes well above Kopper.

Musil also falsely claims that the Chewco scheme "concerned less than $9 Million" and that the unraveling of the scheme did not affect Enron's credit rating. Again, flat wrong: the point of the scheme was to keep $700 million of debt off Enron's books, and the restatement which put that debt back on the books lead directly to a reduction of Enron's credit rating, contributing greatly to the company's death spiral. (To be fair, Musil has a point about the silliness of the three percent ownership rule which Chewco violated --- the source of the $9 million sum --- but it doesn't work in his favor. To claim that Chewco was independent of Enron, when Enron owned 98.5% of it, is ridiculous. If Enron's stake were only 97%, it would still be ridiculous --- Enron would still control substantially all Chewco's assets, and be on the hook for substantially all its debt, which both should properly appear on Enron's balance sheet. The "three percent" accounting rule that says otherwise is, in effect, condoning fraud, so long as it pays lip service to FASB rules. And the rocket scientists at Enron couldn't even manage the lip service).

Beyond that, Musil displays his usual selective quotation and creative manner of reading comprehension. Seeing a statement in an AP report which appeared in The New York Times that

...former executive Michael Kopper's plea said that in at least three partnerships he and others tried to skim millions not for the good of the company, but for themselves.

he goes into a hermeneutic seizure trying to read in a suggestion that Enron's partnership games did not involve intent to cook the books. But the Powers report and the court filings are explicit in saying there was both --- as is the Times' own more careful reporting and news analysis, which speaks of multiple levels of fraud.

To sum up, we have selective quotation, misleading attribution, and outrageous conclusions, all wrapped up in badly written English --- exactly what you'd expect from a Sokalesque test of the credulity of the blogsphere. Which is clearly not what Musil's up to, or he would have declared victory and withdrawn long ago. But his blog has been performing that test since its inception whether he means to or not --- and it's amazing how many people who ought to know better have flunked.

(As a footnote --- the court filings aren't entirely old news. For instance, they add one new partnership, RADR, to the menagerie. But to my eye, there's only one really interesting item --- the kickbacks which Kopper and others apparently provided to Fastow as a condition for being cut on the lucrative, risk-free "Friends of Enron" deals. But that's not central to the charges against Kopper. Instead, it's a dagger aimed straight at ex-CFO Fastow, implicating him in schemes which he cannot possibly explain away as legitimate, aggressive accounting treatments.

In a way what's more interesting is what doesn't appear --- there's very scant mention of Enron officers higher than Fastow. It's hard to believe the prosecutors don't have any relevant evidence; the Powers report describes the board as knowing about at least some of the suspect partnerships, particularly LJM, and then utterly failing to supervise his management of the resulting conflicts of interest --- conspicuously failing, for instance, to follow its own procedures. As a party to the LJM deals, Kopper presumably has something to say about this --- but the prosecutors, so far, are holding those cards close to their chests. It seems they want to flip Fastow first...)