It's the big day. The big Enron trial gets underway in Houston. Despite the very well documented shenanigans of former CEOs Ken Lay and Jeff Skilling, the outcome seems anything but assured. The crimes at the heart of Enron's rise and and collapse are so brazen, arcane and varied that no single trial could possibly make sense of the entire mess. Even though Lay and Skilling are being tried together, they face different charges. The dynamic between their defense strategies will be fascinating. Both have claimed that Enron was a great company in solid shape when they left. Both can't be right. As much as they are hoping for vindication, the trial is not about the legacy of Ken Lay and Jeff Skilling. History's verdict is already in draft form, and it isn't kind. For these two, it's more a matter of nuance than culpability: How much of their conduct was deliberate fraud and how much was willful self-delusion?
For those who have missed the wholesome goodness of your favorite wonk, I apologize for not attending to my devoted readers over the last few days. I have been going full bore on a business plan for an Internet startup (Yes, they're back!) and haven't been able to focus on much else, including nutrition and personal hygene. In other business news, Disney bought Pixar for $7.4 billion in a deal that lands Steve Jobs on Disney's board. Reuters reports that Disney CEO Robert Iger is getting high marks for the acquisition which instantly revitilaizes the company that once owned film animation. Mentioned in almost all accounts of the deal is the value Jobs brings to Disney's board. Jobs, of course, hardly needs further validation as a business visionary. After all, what could be better for a guy's self esteem than appearing on the cover of Fortune magazine next to Cheryl Crow sporting an iPod tucked in her jeans? No seconds acts in business? Actually Jobs is in his third. His second act was not his return to Apple, but his success with Pixar. By the way, Pixar, not Apple, is the company that put Steve Jobs in the billionaire's club. Maybe if this startup takes flight, I'll be joining him there.
Osama bin Laden's absurd offer of a truce seems to me to be an attempt to capitalize on the growing discontent with the Iraq occupation. Jon Stewart, in response to bin Laden's conflating the war on terror with the war in Iraq, had this to say to Public Enemy Number One:
Everyone is still pretty much in favor of blowing the [expletive] out of you.
Oh, and by the way, it's been 4 years, 4 months and 9 days since he attacked us.
A Four-Star General Debunked the Niger-Iraq Uranium Claim
The New York Times reports that "a high level intelligence assessment" debunked the story of the sale of uranium ore to Iraq:
Among other problems that made such a sale improbable, the assessment by the State Department's intelligence analysts concluded, was that it would have required Niger to send "25 hard-to-conceal 10-ton tractor-trailers" filled with uranium across 1,000 miles and at least one international border.
The assessment came nearly eleven months before Bush's infamous "16 words" in his 2003 State of the Union address.
The White House later acknowledged that the charge, which played a part in the decision to invade Iraq in the belief that Baghdad was reconstituting its nuclear program, relied on faulty intelligence and should not have been included in the speech. Two months ago, Italian intelligence officials concluded that a set of documents at the center of the supposed Iraq-Niger link had been forged by an occasional Italian spy.
Unfortunately, President Sluggo, in his effort to scare us half to death, gave more credence to an Italian forgery than to his own State Department and a four-star general:
A four-star general, Carlton W. Fulford Jr., was also sent to Niger to investigate the claims of a uranium purchase. He, too, came away with doubts about the reliability of the report and believed Niger's yellowcake supply to be secure. But the State Department's review, which looked at the political, economic and logistical factors in such a purchase, seems to have produced wider-ranging doubts than other reviews about the likelihood that Niger would try to sell uranium to Baghdad. The review concluded that Niger was "probably not planning to sell uranium to Iraq," in part because France controlled the uranium industry in the country and could block such a sale. It also cast doubt on an intelligence report indicating that Niger's president, Mamadou Tandja, might have negotiated a sales agreement with Iraq in 2000. Mr. Tandja and his government were reluctant to do anything to endanger their foreign aid from the United States and other allies, the review concluded. The State Department review also cast doubt on the logistics of Niger being able to deliver 500 tons of uranium even if the sale were attempted. "Moving such a quantity secretly over such a distance would be very difficult, particularly because the French would be indisposed to approve or cloak this arrangement," the review said.
Even now, a White House spokesman maintained the fiction that this is a story about failures in collecting intelligence, instead of failures in the White House's use of intelligence:
"The White House is not an intelligence-gathering operation. The president based his remarks in the State of the Union address on the intelligence that was presented to him by the intelligence community and cleared by the intelligence community.
White House claims that Bush based his case for invading Iraq on errors made well down the chain of command of the intelligence community are even less credible than before.
"If Dr. King were here today, he would tell us our problem in America is the unjust distribution of wealth," Bullock said. "Yes, we've obtained political liberty, but economic prosperity still remains an elusive part of our liberty."
Benjamin Franklin was born 300 years ago today. While much is made of the religious beliefs of our founding fathers, Franklin represents the rational, scientific roots of our culture and democracy. With their shared love of practical science, gifts of gab, fondness for music and appreciation of pretty women, Ben Franklin and Richard Feynman would have gotten along famously. Franklin created the convention of labeling electrical charges positive and negative, which is still used today, as seen in this Feynman diagram. It's not hard to imagine Franklin nodding in appreciation for Feynman's famous experiment as a member of the Challenger Commission in which he used a cup of ice water and a vise to demonstrate that the space shuttle's o-rings lost their flexibility when subject to freezing temperatures. Franklin would have appreciated this use of this elegant, direct experiment in the public interest.
Over at Fortune, Peter Elkind and Bethany McLean, authors of The Smartest Guys in the Room, offer of preview of the Enron trial that starts in two weeks. Even though Kenneth Lay and Jeffrey Skilling are on trial together, their defense strategies and personalities will hardly be in sync:
But in truth, Ken Lay and Jeff Skilling never much cared for one another. The charming Lay wasn't comfortable with Skilling's sharp edges; the brainy Skilling considered Lay a lightweight glad-hander. And each has, at various points, sought to cast some measure of blame on the other for the 2001 bankruptcy of what was once the seventh-largest company in America -- an implosion that wiped out 4,500 jobs and $70 billion of investors' money while Lay, Skilling, and other top executives walked away with hundreds of millions of dollars.
Both men are likely to make much of the fact that that CFO Andy Fastow stole millions from the company, which is true. They will also argue that Enron was in fine shape up until the end, which is ridiculous. The fun will come when they defend their own conduct at the expense of the other. Lay will claim that Skilling screwed up his company, and that he didn't realize it until Skilling's abrupt departure in July, 2001. Skilling will argue that everything was fine, and that the collapse happened in the months after his departure when Lay returned as CEO. A good way to get a sense of how screwed up things were is to read Enron's classic press release of November 8, 2001 announcing that the company was restating its financial results for the years 1997 to 2001. The release offers a chilling snapshot of Enron's collapse, including a $1.2 billion reduction to shareholders’ equity, $591 million in bogus earnings and the revelation that unwinding just two of the many off-balance sheet entities required the company to acknowledge $2.5 billion in hidden debt. After filing for bankruptcy on December 2, Enron told its creditors that its told off-balance sheet debt totaled $6.971 billion as of November 16. The company's total debt was reported to be $28.977, compared to the figure of $10.229 from its 2000 annual report. In other words, Enron's reported debt increased $18.748 billion from December 31, 2000 to November 16, 2001.
In a statement released on Jan. 13, Scripps Howard News Service Editor and General Manager Peter Copeland said Fumento "did not tell SHNS editors, and therefore we did not tell our readers, that in 1999 Hudson recieved a $60,000 grant from Monsanto." Copeland added: "Our policy is that he should have disclosed that information. We apologize to our readers." In the Jan. 5 column, Fumento wrote that St. Louis-based Monsanto has about 30 products in the pipeline that will aid farmers, "but also help us all by keeping prices down and allowing more crops to be grown on less land."
So who does Fumento blame? The media, of course:
"We're in a witch-hunting frenzy now but, as after all witch hunts, people do return to their senses and regret the piles of ashes at their feet," Fumento writes. "Often it happened fast enough the witch hunters found themselves tied to the stake. I do hope that happens here."
Actually, the ashes at his feet are all that remain of his integrity. Fumento never mentioned that he accepted money from Monsanto in his columns or in a book he wrote on biotech:
The book's acknowledgements cite support from The Donner Foundation and "others who wish to remain anonymous." Fumento didn't disclose the payment from Monsanto either in the book or in at least eight columns he has written mentioning Monsanto since 1999. He explained in his recent column that he focused exclusively on Monsanto due to a "lack of space and because their annual report was plopped onto my lap while I was hunting for a column idea."
Are we to conclude that Monsanto wished to remain anonymous? If so, the company crossed the line. Okay, next question: Where does one draw the line? A PR professional who works to place an oped in a newspaper on behalf of a client (for instance a biotech exec) is doing honest work. A reader can honestly judge the legitimacy of what the exec has to say. A PR exec who writes checks to a supposedly neutral columnist to say what the company thinks has crossed the line -- unless the company insists that the fee or grant be made public.
BushCo Trying to Manage Expectations on the Federal Deficit
A Bush administration official warned that the budget deficit could be as high as $400 billion this year, which hardly sounds like news given the alacrity with which BushCo has run our federal government deep into the red. But the Washington Post reports that they may be playing with the numbers to make the final figure look better:
But some budget analysts cautioned that the estimate should be considered more of a political mark to inform the coming budget debate than an economic forecast. This is the third straight year in which the White House has summoned reporters well ahead of the official budget release to project a higher-than-anticipated deficit. In the past two years, when final deficit figures have come in at record or near-record levels, White House officials have boasted that they had made progress, since the final numbers were below estimates.
We all know it's common practice for political operatives to fudge polling numbers to try to make a final outcome look better by beating expectations. If a company tries that on Wall Street in order to later boast of beating expectations, analysts will eventually catch on that the earnings guidance is being used to try to boost the stock price. Give them credit for trying, since BushCo faces an uphill battle trying to make these numbers look good:
After four years of budget surpluses, the government fell back into a deficit in fiscal 2002, after which the deficit climbed to $378 billion in 2003 and $412 billion in 2004. In 2005, the tide of red ink receded to $319 billion.
For those who don't agree with Dick Cheney that deficits don't matter, that adds up to $1.5 trillion of federal debt that has to be financed, roughly $5,000 for every U.S. citizen.
While the Republicans in Washington have gotten religion in the cause of lobbying reform, another influential group -- institutional investors -- have entered the fray. The Financial Times reports that pension funds are pressuring six companies to disclose all political contributions. Leading the charge is New York City comptroller William Thompson, who manages $88 billion in public pension funds. The group of public pension funds has filed shareholder proposals to require AmSouth Bancorporation, Chevron Corporation, Cinergy Corporation, Southern Company, Union Pacific and Wal-Mart to disclose all direct and indirect contributions. One would expect that an elected official like Thompson would be inclined to use the power of the holdings he manages to push for changes in corporate policy. But the pressure among institutional investors in growing. Institutional Shareholdholder Services, or ISS, is considering changing its recommended policy on corporate political contributions. ISS, the most powerful investor's organization you never heard of, advises institutional investors on shareholder proposals and proxy votes on corporate governance issues. Its proxy voting guidelines are hugely influential for institutional investors that don't have the time to research the many proposals submmitted to shareholders at annual meetings. ISS guidelines "weed out" proposals on social issues that are not considered to directly affect the interests of investors. For instance, ISS publishes the following recommendation on animal testing:
Generally vote AGAINST proposals to phase out the use of animals in product testing unless: • The company is conducting animal testing programs that are unnecessary or not required by regulation; • The company is conducting animal testing when suitable alternatives are accepted and used at peer firms; • The company has been the subject of recent, significant controversy related to its testing programs.
On the other hand, the ISS endorses shareholder activism on executive pay issues:
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity plan if any of the following factors apply: • The total cost of the company’s equity plans is unreasonable; • The plan expressly permits the repricing of stock options without prior shareholder approval; • There is a disconnect between CEO pay and the company’s performance; • The company’s three year burn rate exceeds the greater of 2% and the mean plus 1 standard deviation of its industry group; or • The plan is a vehicle for poor pay practices.
ISS guidelines on CEO pay reflect the consensus among investors that uncontrolled executive pay reflects possible corporate governance problems. ISS guidelines favor proposals on social issues if shareholder value could be affected, which is why it is considering the following change to its proxy voting guidelines:
Current Policy Position: ISS recommends voting AGAINST proposals to report or publish in newspapers the company's political contributions. Federal and state laws restrict the amount of corporate contributions and include reporting requirements. New Policy Position: 1) ISS will recommend AGAINST proposals to publish in newspapers and public media the company's political contributions as such publications could present significant cost to the company without providing commensurate value to shareholders. 2) ISS will recommend on a CASE-BY-CASE basis on proposals to improve the disclosure of a company's political contributions considering: Recent significant controversy or litigation related to the company's political contributions or governmental affairs, and; The public availability of a policy on political contributions.
The ISS is concerned that corporate political contributions "could impact shareholder value if such activities are not properly overseen." If the ISS adopts this change to its guidelines, it will signal that concerns about big money in politics have become fair game for institutional investors.
Castle, one of the leaders of the House's moderate Republican wing, said Boehner seems more open to working with moderates than the current party leadership.
Actually, the marble figures in Statuary Hall are more interested in working with moderates than is the current GOP leadership. Yes, Boehner and Roy Blunt of Missouri, the acting majority leader, have finally noticed that their caucus have an integrity issue. The Washington Post reports that the two leading candidates for Tom DeLay's old job are fighting over who's more tainted by connections with lobbyists:
Both camps this week have been pointing to the other's well-documented connections and activities, some of which are the stuff of legends. They include Blunt's failed effort to insert a provision benefiting Philip Morris USA into the massive bill creating the Department of Homeland Security and Boehner's distribution of checks from tobacco concerns in 1995 to lawmakers on the House floor. Also of note are both men's prodigious fundraising activities, some of which involve individuals and clients with ties to Abramoff.
It's hard to see how either of these two, who are up to their necks in tobacco money, can claim the moral high ground here. Blunt is said to have taken DeLay as his role model, while Boehnert is a protege of Newt Gingerich, who looks downright statesmanlike compared to this sorry bunch. (File under damning with very faint praise.) Once again, we see the dilemma for Mike Castle: How can he represent the interests of Delaware as part of a caucus dominated by far-right lawmakers in bed with big money lobbyists?
The Earned Income Tax Credit (EITC) has been called the federal government's single most effective anti-poverty program. But as the New York Times reports, IRS taxpayer advocate Nina Olson has found that those who benefit from the EITC can have their refunds blocked without being accused of fraud or error:
Ms. Olson said the I.R.S. devoted vastly more resources to pursing questionable refunds by the poor, which she said cannot involve more than $9 billion, than to a $100 billion problem with unreported incomes from small businesses that deal only in cash, many of which do not even file tax returns.
Records showing how thoroughly the Internal Revenue Service audits big corporations and the rich, and how much it discounts the additional taxes assessed after audits, are being withheld from the public despite a 1976 court order requiring their disclosure, according to a legal motion filed last week in federal court in Seattle.
Linda Bilmes of the Kennedy School at Harvard and Joseph E. Stiglitz of Columbia have analyzed the economics of the war in Iraq. Their result: the total cost of the war will run $1 trillion or more.
Bill O'Reilly, that brave defender of Christmas, just said on David Letterman that kids in Plano, Texas were told they couldn't wear Christmas colors to school. The problem is that he admitted two weeks ago that he was wrong on that specific point, after calling Plano "Ground Zero" in the war on Christmas. Media Matters for America has the transcript from December 21:
Now, I made a mistake a few days ago when I said clothing was included in that party dictum. Clothing was not included. It was colors of plates and cupcakes and things like that.
Now I hate to pick on O'Reilly, especially since he's a big media star and I'm a forlorn blogger with a modest (but well intentioned) readership. But with all the resources at his disposal, one would think he could afford, if not a fact checker, then at least a transcript checker. (Hey Bill, here's what you said two weeks ago.) If hiring a fact checker is too demeaning for him, he could say the staffer is in charge of continuity, like the folks on movie sets who make sure that the star is wearing the same tie or whatever. Oh, and by the way, I looked at the lawsuit in the Plano, Texas case. It runs 169 pages. Oh, and another thing, in the historical context, a disagreement over the colors of plates and cupcakes hardly adds up to a religious war. History is littered with religious wars, and not one, to my knowledge, involved cupcakes. Oh, and one more thing, Christmas already happened, and everyone had a great time. I got a very nice sweater from my girlfriend. Thanks Bill. I appreciate it. Really.
Although the charges could bring Abramoff a sentence of up to 30 years in prison, the actual sentence is more likely to be about a third of that if he fulfills his part of the plea agreement, lawyers said. The plea bargain settles one of two fraud and corruption cases against Abramoff, involving charges stemming principally from his lobbying activities in Washington on behalf of Native American tribes. The other case, arising from an indictment in Miami in connection with the purchase of a fleet of casino cruise ships, is expected to be settled by another plea agreement. ... Abramoff is scheduled to enter a guilty plea Wednesday in Florida to two counts of conspiracy and fraud, out of six criminal charges in a federal indictment resulting from the 2000 purchase of the gambling ship company. Abramoff and Kidan were indicted in August 2005 on charges of conspiracy, wire fraud and mail fraud in connection with the purchase of the SunCruz Casinos fleet from Miami businessman Konstantinos "Gus" Boulis.
Who, by the way, is dead:
Boulis was killed in a gangland-style hit in Fort Lauderdale on Feb. 6, 2001. Three men -- including a business associate Kidan had hired to provide catering and security services for SunCruz -- were charged last year in the Boulis murder.
Abramoff's testimony is likely to end the careers of some powerful players in Washington. First up could be "Representative #1" a.k.a. Ohio congressman Robert Ney. Abramoff's former partners, Adam Kidan and Michael Scanlon (a former aide to Tom DeLay) have already pleaded guilty to related charges. Former deputy Interior secretary J. Steven Griles received a job offer from Abramoff while in office. Senator Conrad Burns (R-Montana) and Representative John T. Doolittle (R-California) have benefitted from Abramoff's generosity and are sweating it out. The list of nervous notables goes on and on:
Prior to resolution of any issues involving DeLay, prosecutors are continuing to investigate two of DeLay's top former deputies, Edwin A. Buckham and Tony C. Rudy. Abramoff maintained a business relationship with Buckham, who runs the Alexander Strategy Group with Rudy. Among the areas of interest are questions about client business steered to the Alexander Strategy Group at a time when the firm was hiring the spouses of members of Congress, including DeLay's wife, Christine DeLay, and Doolittle's wife, Julie Doolittle. Christine DeLay was paid about $115,000 over three years while performing a special project -- contacting members of Congress to find out their favorite charity, according to her attorney.
The Congressional Budget Office last month released a report that concludes that a 10% cut in personal income tax rates would not increase revenues. Imagine that! The report, Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates, uses a broad range of assumptions to estimate the offset to lost revenue due to increased economic activity:
Under various assumptions, the supply-side economic effects of the tax cut are estimated to offset between 1 percent and 22 percent of that revenue loss over the first five years.
To state this as clearly as possible, any future tax cut would be funded by increasing the deficit or reducing government spending, which has soared over the last five years. Realistically, this means that tax cuts would be funded by increased borrowing on the part of the federal government. How important is this analysis? Daniel Altman, writing in the New York Times, assserts that the report's brevity belies its importance:
At a modest seven pages, it didn't elicit the same sort of interest as the budget office's budgetary and economic outlooks. Yet it may be one of the most important government publications in years.
This report, which should be required reading for members of Congress, will likely be ignored. But we can return to this analysis next time we hear the argument that tax cuts pay for themselves, which I suspect we will before long.
