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Friday, September 29, 2006

I ALMOST FEEL SORRY FOR HER (...ALMOST)   In case you couldn't tell from my previous posts about my former Wells Fargo and Barclays colleague Pattie Dunn (here and here), my parting from her was not a happy one. So there is an element of schadenfreude for me as I observe her fall from Mistress of the Universe status as non-executive chair of Hewlett Packard. But I have to sympathize with the old gal when two of my least favorite institutions -- the US Congress and the New York Times -- gang up on her. From today's Times:
The former chairwoman, Patricia C. Dunn, who authorized the operation but said repeatedly that she was not its supervisor, came under especially harsh scrutiny because she refused to express contrition when invited to do so.

“I get the sense that you still don’t believe that you did anything wrong,” said Representative Cliff Stearns, Republican of Florida. After trying to answer obliquely, Ms. Dunn finally said, “I do not accept personal responsibility for what happened.”...

Ms. Dunn provoked the most disbelief with her insistence that she did not supervise the investigation and that she believed that private phone records could be obtained legally. At one point, she said she believed until six months ago that one could simply call the phone company and obtain another person’s records.

“You really believe that? You honestly believed that it was that simple?” asked Representative Greg Walden, Republican of Oregon.

Ms. Dunn was also questioned about her blessing of a plan to send a misleading e-mail message to a reporter, along with tracer software that would let H.P. detectives know to whom the document was forwarded.

Reading from a document, Representative Diana DeGette, Democrat of Colorado, noted that Ms. Dunn had said the plan was “clever” and should be sent to Mr. Hurd for approval.

“I regret the use of the word ‘clever,’ ” Ms. Dunn said.

“I’m sure,” Ms. DeGette replied.

By way of defending her actions — or rather, inaction — Ms. Dunn responded that it was not her role to approve investigative techniques.

“This is a very serious problem,” Ms. DeGette said. “You can’t say, ‘I’m just a board member, but I’m not responsible for things that happen because I am not in the chain of command.’ ”

By the way, if anyone investigating this matter had asked my advice, I would have suggested that they ask Pattie why the leak-plugging initiative was code-named "Kona".

Posted by Donald L. Luskin at 5:06 PM | link  

THE GROOVES OF ACADEME   Maybe this prof could start a column for the New York Times! Thanks to reader Gordon Haave for the link.

Posted by Donald L. Luskin at 3:23 PM | link  


Thursday, September 28, 2006

YET ANOTHER REASON FOR A GOLD STANDARD   The United Kingdom's Office of National Statistics admitted today that it had made an enormous error in the calculation of inflation.
The ONS slashed its estimate of annual inflation in export prices from 3.8 to 0.6 per cent after it found it had introduced an error into the calculation.

After the change to export prices, the ONS’s estimate of overall inflation for goods and services produced by British companies and government went down from 3.4 to 2.2 per cent.


Posted by Donald L. Luskin at 7:11 AM | link  

NEW HOPE FOR THE DEAD   The New York Times pimps for Democratic chances to retake the Senate in November, with a front-pager today. The story is long on hope reported as news, and short on facts. Here's the best "expert" quote they could come up with to back up their optimism -- and I doubt I'm alone among readers in having utterly no idea what this is even supposed to mean:
"There’s a big difference in talking about six seats in play and not five," said Stuart Rothenberg, an independent analyst.
Let's see... there is a difference between six and five, that's for sure. Is it a big difference? Not sure. But there is no difference between six and "not five".

Meanwhile, the Tradesports futures contracts have the GOP's chances of holding the Senate at about 80%. I guess the market doesn't read the Times. Wise.

Thanks to Chris Masse for the link.

Posted by Donald L. Luskin at 7:02 AM | link  


Wednesday, September 27, 2006

FROM THE GREAT AND THE GOOD IN DAVOS   The latest gloom-and-doom crap reported uncritically on Bloomberg:
The U.S. lost its position as the world's most competitive economy to Switzerland as budget and trade deficits prompted a slide to sixth in the World Economic Forum's annual rankings.

Switzerland jumped from fourth place last year and Finland, Sweden, Denmark and Singapore all overtook the U.S. with Japan, Germany, the Netherlands and the U.K. rounding out the top 10 in the study of 125 nations by the Geneva-based forum.

The decline in U.S. competitiveness provides another challenge for the world's largest economy as economists at JPMorgan Chase & Co. suggest its potential for growing without inflation is fading and as the expansion shows signs of slowing.

Nary a mention of Sarbanes Oxley, runaway litigation, or the depredations of predatory states attorneys general like Eliot Spitzer. Here's "Donny Baseball" dissecting the WEF's rationale:
...the number one reason that the US is less competitive is...drumroll...the "twin deficits", which of course refer to the budget deficit and the trade deficit. ...budget deficits have been a fairly regular feature of the US economy for decades, certainly for the last twenty or so years and yet the US economy's performance has been fantastic. In the last twenty-five years we have added the equivalent economic activity of roughly two Chinas or five Germanys. Also, one is compelled to ask how the US slipped in the rankings from last year when our budget deficit over the period was shrinking. It must have been the other twin - the trade deficit. Fine, our trade deficit did indeed grow, pretty much just like the majority of years during the exceptional twenty-five years just past. So why now? Why is our projected $850 billion trade deficit trouble when our $726 billion trade deficit last year didn't prevent us from taking the top spot? Is crossing the $800 billion mark the problem?

...the next reason given - Hurricane Katrina. Yes, our government was slow to respond to hurricane Katrina so we are less competitive as a nation. This is just my impression but I think government is no more or less competent than in years past, how could this effect the ranking? How is it that flat-footedness on something that the government was never capable of handling nor is really supposed to handle means our economy is less competitive? Did France take a hit in their standing for letting enraged Muslim youth burn cars and rampage for weeks before responding?

...So what else? Infant mortality and HIV/AIDS. Yes, the US is apparently less competitive because we have more AIDS patients and more babies dying. ...We have more preemies born here because we have such excellent prenatal technology and we have the will to give preemies a chance and many of them die for obvious reasons - other nations don't count or even birth their preemies. AIDS? Is AIDS ravaging a broad spectrum of our productive, working age adult population or is it confined to a subset of adults who are associated with specific behaviors like intraveneous drug use and unprotected sex? It's the latter. Just because we have a higher incidence of AIDS patients relative to Finland reveals not one iota about our relative economic competitiveness.


Posted by Donald L. Luskin at 12:36 AM | link  


Tuesday, September 26, 2006

CORPORATE CEO'S AREN'T THE ONLY ONES BEING PERSECUTED   The Wall Street Journal makes a big fuss in a front-pager today about the possibility that Vanderbilt University president Gordon Gee is paid too much. Never mind that at $1.4 million his compensation is chump change in today's CEO league, and that an institution like Vanderbilt is easily as complex and demanding as a Fortune 500 company. What frosts me most about this article is the scandal mongering over a supposed conflict of interest with one particular trustee of the university, whom I happen to know personally.

The trustees' effort to improve oversight [of Gee's compensation] has also renewed questions about one of their own -- Monroe J. Carell Jr., a key Gee supporter on the executive committee and head of the university's $1.75 billion capital campaign. He and his family have given Vanderbilt more than $40 million.

Mr. Carell is founder and executive chairman of Central Parking Corp., the world's largest operator of parking facilities. He and his family own about 48% of the shares, according to Jeffrey Heavrin, chief financial officer. Central Parking manages Vanderbilt's parking lots and related services under a 1974 contract. It currently earns between $100,000 and $120,000 annually in management fees there, according to Mark Manner, a lawyer for Mr. Carell.

Vanderbilt never put those parking services out to competitive bid, says Mr. Schoenfeld, the university spokesman.

Just what is the implication here? That the $40 million was some kind of bribe, so that the family could milk the university out of $120,000 a year in some sweetheart deal? Okay, let's do the math. If Carell and family earn 48% of $120,000 every year from this deal, that's $57,600 a year. That's the family's corrupt "payoff" for their donation of $40 million (which has resulted in a state of the art children's hospital on campus bearing the family's name). Assuming a zero discount rate, the family breaks even on its $40 million contribution only after the corrupt arrangement has been in place for 695 years. If the discount rate is set at 5.25% (the current Fed funds rate), by my calculations the family never breaks even. If this deal is corrupt, then so be it -- the university should welcome such corruption.

Update... my DC lawyer/lobbyist friend writes, anonymously,

Read a little further in the Journal story and up pops a populist politician pushing himself in front of the story, threatening new federal legislation to regulate compensation in the not-for-profit world.

Sen. Charles Grassley, a Republican from Iowa, intends to introduce a bill next year to strengthen a federal prohibition on "excessive" compensation for leaders of universities and other charitable groups. Good governance "can make the difference between universities where presidents live high on the hog and where students come first," says Mr. Grassley, chairman of the Senate Finance Committee.

How about an altogether different idea? What if the Chairman of the Senate Finance Committee spent his time and energy doing his own job – reforming all federal taxes – and let the board at Vanderbilt do theirs? The ugly truth is that power is often distributed in Washington by accident. Chuck Grassley has little expertise in the matters under his control – finance, tax, trade policy, health care, etc. – but because he stands long enough in office as his name comes up in the seniority rotation, he gets a plum job. As Winston Churchill said, democracy is the worst form of government except for all the others.

The trouble with populists such as Senator Grassley is that they do not believe some individuals are extraordinary. They do not realize that the greater good is best served by signing the extraordinary players to your team. If the government tries to limit incomes in either the public or the not-for-profit center by using the tax code as a blunt instrument, it will kill innovation and growth. If taking risks can’t earn a bigger reward, then our society will become mediocre, like the government itself.


Posted by Donald L. Luskin at 8:59 PM | link  

AT LEAST THERE ARE NO NUCLEAR MISSILES INVOLVED   Can Tradesports do anything right? Here's their new futures market on presidential approval ratings:

Here are the rules. Huh??!

Politics
Election Contracts
0-100 Candidate/Political Party A wins: The expiry will be 100 if Candidate A wins the specified election and 0 if he does not.
The Result:
The expiry price is determined by the final result of the election as determined by the authorized Board of elections or similar regulatory body. For Political Party contracts any tie will be broken by the authorized Legislative procedures that are used to break ties.
Postponement:
If the election is postponed until another date, the contract expiration date will be moved according. Similarly if the final count is delayed the contracts will remain open until the result from the final count is officially declared.

Posted by Donald L. Luskin at 7:51 AM | link  

PUT A FORK IN IT (AND TWIST)   Corporate lawyer Viet Dihn slams HP's Pattie Dunn, my former partner at Barclays Global Investors, in today's Wall Street Journal. This one hurts, because it's more than the usual diatribe about the ethics of spying on your own board. Dihn assails Dunn as a priggish and unimaginative "governance perfectionist," obsessed by process over substance. Well, if the shoe fits... after all, she managed index funds for 25 years and sold her soul to a 400 year old British bank. Let people like this manage trillions in index funds -- but for heaven's sake, don't put them in charge of technology companies.
Most perplexing was the supposed trigger for this unfortunate foray into corporate intrigue. The CNET article, if anything, burnished the image of H-P and its management. There was no disclosure of material nonpublic financial information to trigger regulatory or legal issues. Amid banal details about how long the days were and how hard the directors worked were glimpses into the company's general strategic and competitive vision. Mr. Hurd was engineering an impressive turnaround, and the article showed that H-P was not simply cutting costs and laying off workers but rather executing a shrewd strategic plan to best its competitors.

It is difficult to see how a puff piece with nuggets already publicized by H-P could be viewed as harmful. The board has since acknowledged that "at H-P's request, Dr. Keyworth often had contacts with the press to explain H-P's interests. The board does not believe that Dr. Keyworth's contact with CNET in January 2006 was vetted through appropriate channels, but also recognizes that his discussion with the CNET reporter was undertaken in an attempt to further H-P's interests." And there is no general duty of confidentiality for directors, only a duty of loyalty to act in the best interests of the corporation and its shareholders.

So the whole thing boils down to Mr. Keyworth deciding to speak favorably to a reporter without asking for permission...

Patricia Dunn reportedly is a "governance perfectionist." When Mr. Perkins's objections to Ms. Dunn's investigation surfaced publicly, she called the conflict "part of the board's progression from one that was more personality driven to one that is process driven and capable of upholding today's highest governance standards." Her supporters whispered that Mr. Perkins had challenged her proposal for a mandatory director education program on corporate compliance. And in resigning last week she emphasized, "I followed the proper processes by seeking the assistance of H-P security personnel." Left unanswered was whether the sub rosa investigation was a good idea or whether the reaction was reasonable to the infraction....

On July 18, the same day that [director] Tom Perkins formally confirmed his protest to the entire board, he wrote Mr. Hurd a personal email that bears quoting in its entirety:

"Dear Mark: A while back I promised you that we directors would clean up our act, and free you from worries about the H-P board. I am really sorry that I didn't deliver on this, and I apologize for the necessity of raising the issue of illegal activity by the board chairman in today's email to the board. But, it's an extremely serious matter, and I have legal obligations.

"Aside from this, I worry that Pattie, as new chair of N&G, will 'pack' the board with the kind of directors she so admires -- ciphers from high cap companies, with no fast-cycle technology background, and certainly no Valley entrepreneurial genes.

"I worry that you will wind up with a 'blue ribbon' board that will be of zero, or even negative, value to you when the going gets tough. I don't wish you bad luck -- but life eventually delivers tough scenarios to CEOs of big companies -- and I doubt if H-P will prove to be the exception.

"Anyway, I am rooting for you still, and I hope everything works out as you wish best.

"Sincerely, -- Tom."


Posted by Donald L. Luskin at 5:58 AM | link  


Monday, September 25, 2006

THE MEDIA IS FICKLE? NEVER!   I was looking on Time Magazine's web site for the famous 1999 cover proclaiming Alan Greenspan to the chairman of the Committee to Save The World.

In poking around, I discovered (so to speak) this one from just a few weeks earlier.

Update [9/26/2006]... Reader Rick Waddell comments,

I always loved the following excerpt from Time's hagiographic portrayal of this trio:
"In the Reagan Administration economic policymaking was guided not by analysis but by conclusions--specifically a belief in so-called supply-side economics. No matter what the data showed, the results among Reagan-era economists like Arthur Laffer were always the same: tax cuts and less regulation were the solution. Rubin, Greenspan and Summers have outgrown ideology. Their faith is in the markets and in their own ability to analyze them."
Imagine, barely more than 9 years after the fall of the Berlin Wall, and Time told us with a streight face (figuratively speaking, but with three real faces on the cover) that a "faith" in free markets has "outgrown ideology," and is seemingly the result of "analysis." So what was the Cold War about anyway?

Two other aspects that also stunned me when this appeared, and still amaze me - first, Time is speaking positively about faith, and secondly, the author, Joshua Cooper Ramo, could write incoherently that policy-making for Reagan was guided by conclusions - which was clearly bad in Ramo's view - but for the clintonista trio, policy-making was guided by faith in markets - which was clearly good. One might fairly argue that basing economic policy on a faith in markets is also being guided by conclusions, but with a mainstream media publication touting faith and markets in the same sentence, why nitpick?


Posted by Donald L. Luskin at 8:31 PM | link  

POOR AND STUPID MEETS RICH AND STUPID   The $6 billion losses in the Amaranth hedge fund have grabbed all the headlines, but the losses in speculative energy trades have not been limited to hedge funds for the rich. Today on Bloomberg:
Mutual fund investors, captivated by oil's 88 percent appreciation in two years, increased their energy holdings in 2006 just in time to lose $4.5 billion.

That's the damage U.S. oil and gas funds recorded as crude plunged 23 percent from a record in July, according to data compiled by Bloomberg. The Guinness Atkinson Global Energy Fund is down 14 percent, and Fidelity Investments' $2.7 billion Select Energy Portfolio has lost 12 percent. The U.S. Global Investors Inc. $1.3 billion Global Resources Fund slid 12 percent...

Declines in these mutual funds are approaching the $6 billion loss at Amaranth Advisors LLC, the Greenwich, Connecticut, hedge fund that bet wrong on natural gas, which has dropped 59 percent this year. Hedge funds are private pools of capital that can only accept money from individuals with more than $1 million because regulators figure they can take more risks than people in mutual funds.

The rich are different -- they have more money. Thus a single hedge fund can lose as much as all the energy mutual funds put together in dollar terms. And hedge funds can use leverage to take more risk, thus it is unlikely that many energy mutual funds have sustained the percentage losses that Amaranth did. But let it never be said that markets aren't democratized, for good and for ill.

Thanks to Donny Baseball for the link.

Posted by Donald L. Luskin at 2:17 PM | link  


Sunday, September 24, 2006

FORD DIDN'T HAVE A BETTER IDEA   How come Gretchen Morgenson doesn't worry about this kind of destruction of shareholder value?
Bill Ford just announced that he would step down as CEO after a disastrous 5-year reign during which company shares lost two-thirds of their market value. While Ford Motor’s woes can’t entirely be blamed on Ford, you have to wonder what Ford Motor’s board was thinking when it selected him as CEO.

Ford appears to have had two major qualifications that impressed the board – he was the great-grandson of company founder Henry Ford and he chaired the company’s Environmental and Public Policy Committee...

Ford always appeared more concerned about being green than being profitable. In May 2000, he declared that SUVs – his company’s most profitable product – harmed the environment. He lectured a Greenpeace audience that something needed to be done about global warming. Ford focused on turning the company’s massive Rouge plant into an “icon of lean, green manufacturing” and issued reports about vehicle exhaust contributing to global warming.

Thanks to Chris Ciancio for the link.

Posted by Donald L. Luskin at 1:16 PM | link