Issues & Opinions

From the Los Angeles Times, via a WSJ email snippet this morning:

Los Angeles Times: While in private business, Mitt Romney — whose presidential campaign cites his record of closing state tax loopholes as Massachusetts governor — used shell companies in two offshore tax havens to help eligible investors avoid paying U.S. taxes, federal and state records show. Mr. Romney gained no personal tax benefit from the legal operations in Bermuda and the Cayman Islands, but his aides and former colleagues acknowledged that the tax-friendly jurisdictions helped attract billions of additional investment dollars to Mr. Romney’s former company, Bain Capital, and thus boosted profits for Romney and his partners.

Sadly, this tells me nothing I didn’t already know about Mitt Romney - he’s clearly a smart guy, and he’s clearly a competent businessman. Whether either of those makes him the best suited presidential candidate is both another thing completely and a matter which doesn’t concern me at all right now.

However, the intimation that there’s some undercurrent of hypocrisy here strikes me as overbaked by half - he used the system, properly & as designed, to benefit those to whom he had a fiduciary duty. The fact that he and his partners boosted their profits from having satisfied their clients strikes me as precisely the result he expected, and deserved.

Surely there are other crucial things about him we need to know, but this ain’t on that list.

Bookmark to:

Who knew? There’s a backlash against tithing, according to today’s WSJ.

Perhaps everyone but me knew, since I’m an irreligious fellow.

That last trait makes it predictable that I’d point out the obvious: that churches are a business, like any other. It is hard to argue otherwise, concerns about heavenly salvation and eternal damnation notwithstanding. Denominations, and the churches within them, compete with one another for congregants, and they do so with a variety of devices.

The Megachurch Effect

Resistance to tithing has been increasing steadily in recent years, as more churchgoers have questioned the way their churches spend money. Like other philanthropists today, religious givers want to see exactly how their donations are being used. In some cases, the growth of megachurches, some with expensive worship centers equipped with coffee bars and widescreen TVs, have turned people off of tithing. And those who object are finding like-minded souls on the Web in theological forums.

(emphasis mine)

Several things could explain churches’ splashing out on such non-eternity-related items as coffee bars or the long-term lease and $100 million renovation of the Houston Compaq Center (nee Summit), but the three most obvious are grandiosity, marketing, and both. A for-profit business might engage in the same sorts of activities, for the same reasons. And bully for both, the secular and the spiritual - it’s all part of the game of making certain your operations remain funded. Customer retention is an issue in both spheres:

Church leaders say tithing isn’t just a theological issue, but a financial one. Americans gave an estimated $97 billion to congregations in 2006, almost a third of the country’s $295 billion in charitable donations, according to Giving USA Foundation, a nonprofit educational organization in Glenview, Ill. But giving to religion is growing more slowly than other types of giving, says Patrick Rooney, director of research at the Center on Philanthropy at Indiana University. That’s partly because people are attending church less frequently, says Mr. Rooney, and are giving to a wider array of causes, including secular ones.

The difference is, that you’d seldom (never?) hear a businessman outside of religion making a comment like this:

That worries some church leaders. “If everyone gives 2% of their income because that’s what they feel like giving, you aren’t going to have money to pay the light bill and keep the doors open,” says Duane Rice, an official with Evangelical Friends International, a denomination that believes that tithing is required by the Bible.

Ignore, please, the nougatty richness of Mr. Rice’s appeal to biblical authority in claiming religion’s right to proportionate payments, and focus just on the plaintive cry that, well, it’s got to be 10%, because if not, well, they’ll not be able to keep the lights on.

He’s badly confused on cause and effect here. For-profit or not, the lights going off is God’s way of saying you didn’t make your customers happy, thus bringing in enough money, and not the other way around.

“From each according to his ability, to each according to his need”

Karl Marx would be so proud. Up to but not including the empire-building, self-importance, and rank perfidy sometimes seen in the clergy.

I could hardly care less how tricked-out any given religion cares to make itself. As long as they can get people to pay for the services offered, more power to them. Offering a service people value is how business is done. Whining when you find that they don’t value your service? Not very businesslike at all.

Bookmark to:

In my time, I’ve seen examples of just about every scam possible via the Internet. It takes a lot any more to even get my attention as I’m one-button flushing my spam folders.

However, when someone goes above and beyond the call of scum-baggish presumption in reader/recipient stupidity, I think it deserves to be highlighted. I’m a “giver” that way.

Below, in its exact form, including the badly mangled HTML formatting, but minus the actual link to the scamster’s site, the silliest and least plausible piece of spam I think I’ve received in at least a couple days:

		After the last   annual calculations of your fiscal activity we have determined that you are eligible to receive a tax refund of $93.60. Please submit the tax refund request and allow us 6-9 days in order to process it. A refund can be delayed for a variety of reasons. For example submitting invalid records or applying after the deadline. To access your tax refund online, please click here Regards,  Internal Revenue Service

© Copyright 2007,   Internal Revenue Service U.S.A. All rights reserved..

• The IRS always communicates with me by sending me email at my blogging email address, natch
• The IRS always speaks to tax payers that way, all courtly-like, and offers its “Regards”
• The IRS always gets things done in 6-9 days
• The IRS claims copyright on all of its email messages, just like normal citizens do
• While claiming said copyright, the IRS always makes sure the recipient knows that it’s the “Internal Revenue Service U.S.A.”, to avoid confusion with all the other Internal Revenue Services around the world.

It occurs to me that if we didn’t have Russian, Romanian, and Slobovian hackers, we’d have to invent them, for our own amusement.

Bookmark to:

John Mackey, CEO of Whole Foods Market, has some ’splainin to do. From the San Jose Mercury News, this was the headline:

Whole Deception: CEO of Whole Foods used fake name to hype stock on Yahoo message board

Along with some analysis and outraged opinionating (with which I take no issue), the Merc’s Vindu Goel points to a free WSJ link, so I will too:

Whole Foods Is Hot,
Wild Oats a Dud —
So Said ‘Rahodeb’

Then Again, Yahoo Poster
Was a Whole Foods Staffer,
The CEO to Be Precise

By DAVID KESMODEL and JOHN R. WILKE
July 12, 2007; Page A1

In January 2005, someone using the name “Rahodeb” went online to a Yahoo stock-market forum and posted this opinion: No company would want to buy Wild Oats Markets Inc., a natural-foods grocer, at its price then of about $8 a share.

This all comes to light as a direct result of the Federal Trade Commission’s attempts to derail, on antitrust grounds, the proposed purchase of Wild Oats Markets by Whole Foods. Much ink has been spilled supporting either the company or the FTC, and the arguments tend to revolve around the definition of the relevant market in which the two should be measured for dominance.

I have no opinion on the matter, and don’t frankly care if they get a deal done, remain independent and separate, or both declare Chapter 7 tomorrow.

I do find interesting, however, the fact that the CEO of a non-trivial public company thinks, or thought, that posting anonymously on Yahoo boards was legal, proper, or even marginally sane.

Internet sockpuppets are a disgusting phenomenon, even when financial markets aren’t their targets. Pretense to have support for a stock, a company, or an opinion, lacking an actual instance of support, is offensive. It’s made worse, in the case of Whole Foods, by the fact that for much of the period in which Mackey was sockpuppeting the stock, it had no need of any support, having been a steady gainer up until the end of 2005.

Mr. Mackey declined to be interviewed. But he soon posted on the company Web site, saying that the FTC was quoting Rahodeb “to embarrass both me and Whole Foods.” He also said: “I posted on Yahoo! under a pseudonym because I had fun doing it. Many people post on bulletin boards using pseudonyms.” He said that “I never intended any of those postings to be identified with me.”

Mr. Mackey’s post continued: “The views articulated by rahodeb sometimes represent what I actually believed and sometimes they didn’t. Sometimes I simply played ‘devil’s advocate’ for the sheer fun of arguing. Anyone who knows me realizes that I frequently do this in person, too.”

Let’s see - he’s been the CEO since he founded the company, and was the CEO for the two months that I owned the stock after its IPO, late last century. (I was jammed into the IPO by my broker, because that’s the way things were done in the early 1990s - I didn’t like the stock, don’t particularly like the company, and have minimal tolerance for sanctimonious vegans in any event).

Sometime in the last 27 years, it should have been made clear to him, perhaps by either his general counsel or his yogi, that CEOs of public companies get their “sheer fun” by playing Pebble Beach or Augusta National, or by throwing themselves into philanthropic ventures, or by any number of other things that are both legal and not likely to bring the humiliation associated with letting the public markets know, definitively, that you’re a nincompoop.

Here are just a few examples of other actions he could have taken, all potentially embarrassing to some degree, but which would have been less embarrassing than what he’s done:

• Have his phone number identified on Deborah Palfrey’s call logs
• Have a voicemail rant against his daughter made public
• Throw a lavish birthday party for his wife
• Post on a Yahoo message board under his real name

None of the above would necessarily indicate good temperament, and three of them could exhibit potential for moral or ethical lapses, but none of them is an explicit indication of stupidity.

For about eight years until last August, the company confirms, Mr. Mackey posted numerous messages on Yahoo Finance stock forums as Rahodeb. It’s an anagram of Deborah, Mr. Mackey’s wife’s name. Rahodeb cheered Whole Foods’ financial results, trumpeted his gains on the stock and bashed Wild Oats. Rahodeb even defended Mr. Mackey’s haircut when another user poked fun at a photo in the annual report. “I like Mackey’s haircut,” Rahodeb said. “I think he looks cute!”

What Mackey actually did? Yeah, it’s an indication of stupidity, arrogance, and, as seen above, no small amount of immaturity. Arrogance, the markets can handle. Stupidity and immaturity? Less so. We like to at least believe our corporate titans are smarter than their average counter-person.

The WSJ piece is from the issue to be delivered later this morning, so the market hasn’t yet reacted to his grave mistake. It doesn’t take Fellini to hazard a guess that by this time next week, he’s going to be the ex-CEO of Whole Foods Markets, and the FTC is likely to be no longer needed to watchdog the alleged consumer interest in keeping Wild Oats out of Whole Foods’ clutches.

This looks like a business-mortal error on Mackey’s part. But it should provide good theater, for at least a short time.

Bookmark to:

I bring you David Gross of San Francisco, who not only:

…asked his bosses for a radical pay cut, enough so he wouldn’t have to pay taxes to support the war.

but

In any event, his employer turned him down and he quit.

Which, I guess, good for him, standing up for his convictions that way and all. Left unanswered, at least for now, is whether federal taxes are levied on the wages of “guests of the Federal Government”. Why would I be curious about that? Because

Gross, 38, now works on a contract basis, and last year he refused to pay self-employment taxes.

All by itself, that doesn’t distinguish him from a lot of people. The AP story notes that between 8 and 10 thousand people fail to pay their taxes for reasons similar to those of Gross. Contained in the story, at a meta-level, is the fact that this particular non-Rhodes Scholar allowed the AP to write a story about him evading taxes. Nothing like calling out the IRS by name to get them to leave you alone. Posing in two pre-mug shots for the story? A priceless addition, though I’m sure the Feds could already have found him whenever and wherever they needed to.

Of course, these days, he won’t end up becoming a guest of the Federal Government:

Unlike the days when Thoreau was sent to prison in a tax protest against the Mexican-American War, modern war tax protesters rarely go to prison, according to tax resisters. The IRS may take their money from wages and bank accounts - with penalties and interest - after sending a series of letters.

“They’re very polite, which makes it a little boring,” said Rosa Packard of Greenwich, a longtime anti-war tax protester.

But if he thinks he is going to avoid collection of his taxes owed, by hook or by crook, after having trumpeted his resistance on a national newswire, he’s perhaps not smart enough to be gainfully employed, as a contractor or otherwise.

Will his protest, and others like his, have the desired effect? As James Taranto said in the OpinionJournal piece where I first saw this story, “Something tells us the economy will survive.”

Addendum - Mr. Gross expands on his and his fellow protesters’ thoughts and methods, with emphasis on the actual question I posed:

A frequent challenge to conscientious tax resisters whose resistance leads to fines and penalties is “won’t the government just end up with more in the end?”

The Ghandi quote that follows the snippet above is interesting and informative, if not completely dispositive.

Unlike Mr. Gross’ first commenter Ken (bottom), I have no desire to see Gross locked up, and wish him the best in what I consider to be a Quixotic quest, even though I disagree with it.

Bookmark to:

What do these two suits have in common?

“Couple sue Wal-Mart over slip in vomit” (AP/Nashville Tennessean) and
“ACLU: Boeing offshoot helped CIA” (AP/Houston Chronicle)

Simple:

• They each have a distinct odor associated with them
• They’re both based on slippery circumstances
• They’re both as baseless as the day is long

Only one of them, however, appears to have been categorized by the Associated Press as an “Odd Story”. So let’s look at that one first:

Couple sue Wal-Mart over slip in vomit

DAVENPORT, Iowa (AP) — A woman’s fall in a puddle of vomit has resulted in a lawsuit against Wal-Mart. June Medema, slipped in the vomit at a Davenport Wal-Mart on June 13, 2005, according to the lawsuit, filed by Medema and her husband, James, in Scott County District Court earlier this month.

Medema claims that she was seriously injured in the fall.

The lawsuit alleges that Wal-Mart’s negligence led to Medema’s fall, but it does not specifically say how the store was negligent.

John Simley, a Wal-Mart spokesman, decline comment saying he hadn’t seen the lawsuit.

The lawsuit claims that Medema suffered serious neck and upper back injuries in the fall and has undergone several surgeries and is unable to work.

It’s a mercifully short story, so it’s included here in its entirety. All you need to know is in that third paragraph - “…but it does not specifically say how the store was negligent.” In order to prove negligence, of course, the Medemas will have to prove that Wal-Mart knew the vomit was puddled on the floor. Which will be rather difficult - if they didn’t see it, why should Wal-Mart have done so?

As to the second story, I can completely understand the ACLU going after a Boeing subsidiary - They can’t sue the US government or the CIA on a classified matter, so they simply picked someone else in the transaction chain to sue.

NEW YORK — A Boeing Co. subsidiary that may have provided secret CIA flight services was sued Wednesday by the American Civil Liberties Union on behalf of three terrorism suspects who claim they were tortured by the U.S. government.

The lawsuit charges that flight services provided by Jeppesen Dataplan Inc. enabled the clandestine transportation of the suspects to secret overseas locations, where they were tortured and subjected to other “forms of cruel, inhuman and degrading treatment.”

The ACLU, of course, has been known to provide valuable legal services. They’ve also been known to tilt at windmills in pursuit of an agenda that tends to be decidedly leftist. Not “liberal” - leftist. As I said, I can understand their grasping at straws to find someone to sue, because money-grubbers have to go where the money is, even if they expect to get no money out of the matter.

I can’t understand why they think their suit will survive a summary judgment request. Jeppesen Dataplan didn’t man the flight, didn’t own the plane, and didn’t load or unload alleged passengers from the alleged extraordinary alleged rendition alleged mission. Jeppesen provides flight planning services. Logistics.

Undaunted by this bit of reality, the ACLU soldiers on:

The ACLU said the company “either knew or reasonably should have known” that they were facilitating the torture of terrorism suspects by providing flight services for the CIA.

That’s one of the ten most absurd things I’ve read in the last 48 hours. Having been on flights which used the services of flight planning companies like Jeppesen, and having occasionally been with the pilot when he was planning the flight, I’m comfortable asserting that in no case did a flight services vendor demand to know, let alone show even the slightest interest in, what the purpose of the flight was. Which is just as well - it would have been none of their business, and they’d have been told as much.

It occurs to me that there are two other things these two suits have in common - they’re both weakly disguised fundraising attempts, and neither one will be successful at anything other than garnering publicity for its plaintiff.

Bookmark to:

Seen in an article from today’s WSJ, Overstock.com Chairman and CEO Patrick Byrne is again in the news. Not for the first time this year, it seems that Overstock.com has lost another director: “Overstock Director Resigns, Citing Suit Against Brokers”. Ray Groves has resigned from the board. The storyline back on Feb 23, when John A. Fisher resigned? “Independent Director at Overstock Resigns Over Brokerage Lawsuit”. We’re way beyond having the makings of a pattern here.

Mr. Fisher, an investment-banking adviser who has served on Overstock’s board since 2002, praised Chief Executive Patrick Byrne’s leadership in his resignation letter filed with the SEC, but said he didn’t agree with the company’s lawsuit, which alleges a massive, illegal stock-market manipulation scheme by major brokerage firms.

It’s old news to anyone who’s followed this particular melodrama, but Byrne’s own father, John, resigned from the board on July 31, 2006. Initial reports (WSJ, March 3, 2006) claimed that he planned to relinquish his chairman’s post while remaining a director, and that he held of 9% of the company’s equity.

Among the reasons Mr. Byrne says he may leave that post is disagreement with one of his sons — Overstock Chief Executive Patrick Byrne — over the amount of time the younger Mr. Byrne is spending on a highly public battle with short-sellers and analysts the son alleges are conspiring to damage the company’s stock.
…
“I don’t think it’s a wise idea to be chairman with a headstrong son,” the elder Mr. Byrne added. However, he said he intends to remain on the board as a director and will also remain an investor.
…
Patrick Byrne has often referred to his fight with these shorts and analysts as a “jihad,” …
…
“I can’t tell whether this ‘jihad’ adds to the value of the stock or subtracts from it, but what it does is takes from Patrick’s time,” the father continued. He says he has voiced his concern to his son “endlessly,” but so far hasn’t been heeded.

(ellipses mine)

The current board of directors contains only 4 members for now. At least three directors, including his father, thought he was carrying his “jihad” too far.

The lawsuit at the center of the director resignations? (filing available at Overstock’s website)

Overstock’s $3.5 billion lawsuit, which alleges a massive, illegal stock-market manipulation scheme by major brokerage firms, including Morgan Stanley & Co., Goldman Sachs Group Inc., Bear Stearns Cos. and Citigroup Inc., has been a major source of tension within the company.

The Feb 2, 2007 filing named defendants, including those not listed above (BofA, Merrill Lynch, Credit Suisse, Deutsche Bank, BoNY, UBS, and “Does 1 through 100″), alleged to make up 80% of the prime brokerage market, based on “aggregate client assets”. That’s one way to measure size in the prime brokerage market, though I don’t know why it matters in this case. They could have radically simplified and shortened the filing without changing its meaning much simply by listing as defendants “Everyone”.

What is the problem they cite? You can read the full details either in the filing linked above or in the CEO’s FAQ at Overstock’s website, but in a nutshell:

• When a trader believes a stock’s overvalued, s/he can sell it short, profiting if able to repurchase it at a lower price. The mechanics of this are similar to normal trading, in that s/he buys low and sells high, just in the opposite order.
• In order to sell stock you don’t own, you must borrow it from someone who does
• The purchaser of your short-sold stock has the stock “delivered” (normally electronic book notation), T+3, or three business days after trade
• If the short seller, or the short seller’s broker, can’t locate stock to borrow, the book notation doesn’t occur, and a technical violation called a “failure to deliver” is triggered. Effective Sep 7, 2004, with compliance required from Jan 3, 2005, Regulation SHO was supposed to stop these failures to deliver, by forcing firms to do a “locate” (find borrowable shares), before selling on behalf of their own short selling client.
• Marketmakers are generally exempt from this rule, for liquidity reasons
• According to Byrne, the rule doesn’t work or isn’t enforced.

Having been on the sharp end of a shortseller campaign a time or two, I understand the Company’s instinctive reaction to try to do something about the problem. I’d even agree that some reaction is appropriate. My advice? Try addressing or proving wrong the naysayers, with actions not words.

Whining and bellyaching, on the other hand, are of no help. Ever. Neither, in the case of anything but the most solid and profitable company, is encouraging one’s stockholders to transfer all company stock from margin accounts into cash accounts, or worse, into physical share certificates. Such requests never come from solid and profitable companies, by the way, because they never have Overstock’s problem. Normally, such transfers would make it impossible for the stock to be lent. In Overstock’s case, it doesn’t matter, they claim, because their stock’s being naked shorted, and that the new buyers aren’t receiving the stock they bought. The effect of this, according to Byrne?

We know Overstock has sold just over 19 million shares to the world, but that the world seems to own between 35 to 40 million shares of Overstock.

Byrne is able to seem, in some cases, like a reasonable, intelligent executive. Heck, he might even actually be reasonable and intelligent. But I don’t know where he gets his numbers, either about number of shares naked shorted or supposed shares outstanding. Currently, it seems there are 21 million. And if he thinks that the imaginary 14-19 million phantom shares of stock are the reason the price is no longer $71 (Dec 2004), but instead $18.40 (today), then he should have no trouble rounding up private equity to take out the 21 million shares of equity, causing great financial loss, pain, and consternation to the supposed evildoers who’re trying to destroy his company. Pay no attention, of course, to the fact that as of Mar 31, 2007, several of his largest institutional holders happen also to be on the list of defendants in the Feb 2007 lawsuit.

He’s made his company a joke with his years-long battle against people who are either right, and the stock will go down, or they’re wrong, because he and his business model will be proven to be superior, causing his stock to go up and his short-sellers to lose the shirts on their backs.

PR and lawsuits on matters like this never work, and groups of aggressive shortsellers (as distinctly opposed to individual shortsellers) are, believe it or not, almost always right. The stocks they short don’t go down solely or even mainly because they sell them short or manipulate the market. They go down because they’re overpriced. Cause, meet effect.

As a side matter, the fact that marketmakers are allowed to naked short is interesting, particularly in the case of a small-cap stock like this one. If they decide to sell stock they don’t own or possess, they can do so until the cows come home. They risk getting smoked if the stock goes up instead of down, but they’re big boys.

Back during 1992 & 1993, a marketmaker and bankruptcy arbitrageur named the Scattered Corp sold short more of the stock of LTV than existed everywhere in the market. Think of it as naked shorting on steroids, pre-Regulation SHO. Scattered Corp made out like a bandit, along with any other short sellers in the market at the time, because when LTV exited bankruptcy on June 28, 1993, its stock was functionally extinguished, replaced with warrants valued at three or four cents per share. Gain? $27 million in 22 trading days, totally legal, and the result of nothing but legitimate use of the market. The inevitable legal case in the matter was styled “Sullivan & Long Inc. v. Scattered Corp.” and a Google search returns 20 or 30 links to other cases referencing it, plus an entry at the Scattered Corp. website, which is a copy of a pleading in a follow-on case by Scattered against the Chicago Stock Exchange et al, related to the LTV trading. That derivative case spells out the facts of Sullivan & Long Inc. v. Scattered Corp. pretty well. The original case was dismissed with prejudice, with dismissal confirmed on appeal. A highlighted version of the Seventh Circuit opinion (Judge Richard Posner’s court) in the dismissal is also available.

…the principal defendant, a Chicago Stock Exchange market maker (a dealer willing both to buy and sell a particular stock or other security for his account on a regular basis, 15 U.S.C. sec. 78c(a)(38)) with the alarming name of Scattered Corporation, sold short huge quantities of the old LTV shares. It sold short, in fact, tens of millions of such shares a week, for a total, when trading ended on June 29, of 170 million shares, far more than the 122 million old LTV shares outstanding. The excess of shares sold short over total shares outstanding is the focus of the plaintiffs’ complaint.
…
The effect of trading on an information advantage is to dispel, by penalizing, ignorance and to bring market values into closer, quicker conformity with economic reality. The profit that such trading brings at the expense of less knowledgeable traders provides the incentive for a private, for-profit firm, such as Scattered, to provide this economic service.

(ellipsis mine)

If you want to see an alternative take on naked shorting, the rest of the decision is an interesting read. See also the Business Week articles (from the 8/5/1996 issue), “The ‘Bad Boys’ of Chicago Arbitrage“, “The Secret World of Short-Sellers“, and two related tables, “The Truth About Those That Sell Short” and “Four Ways Shorts Get Stung“. (The rules under which Scattered did all of this have, of course, changed.)

The markets work when they’re allowed to work, as Byrne has apparently heard from at least three associates, along with their recommendation that he ought to focus on his business. If he dropped the matter and got on about proving his business really is a good one, in no time at all, the naked short problem would vaporize. Short sellers never do so for personal reasons - it’s always financial, and remans so until they’re proven wrong. Byrne does himself and his company no credit by feigning outrage and continuing his jihad.

Addendum - I hold no position in OSTK, long or short, by the way.
Addendum - 5/26/2007 - BusinessWeek details added

Bookmark to:

In a Houston Chronicle (AP) story from yesterday evening that I initially missed, I find that the “House approves anti-OPEC bill“.

WASHINGTON — Decrying near-record high gasoline prices, the House voted Tuesday to allow the government to sue OPEC over oil production quotas.

The White House objected, saying that might disrupt supplies and lead to even higher costs at the pump. The Organization of Petroleum Exporting Countries is the cartel that accounts for 40 percent of the world’s oil production.

My reaction wouldn’t be much different if they’d deigned to “allow the government to give every citizen a unicorn”.

The current, nominally “record high”, prices at the pump are a populist’s dream come true. They provide a platform from which our congressmen can cater to the least-intelligent of their constituents, those who think Congress can solve all problems.

“We don’t have to stand by and watch OPEC dictate the price of gas,” Judiciary Committee Chairman John Conyers, D-Mich., the bill’s chief sponsor, declared, reflecting the frustration lawmakers have felt over their inability to address people’s worries about high summer fuel costs.

Actually, John, yes you do have to stand by and watch, because it’s their oil, and they control both the price and the market availability of the basic commodity from which we get our gasoline.

Conyers accused the OPEC engaging in a “price fixing conspiracy” that has “unfairly driven up the price” of crude oil and, in turn gasoline.

His measure would change antitrust laws so that the Justice Department can sue OPEC member countries for price-fixing, and would remove the immunity given a sovereign state against such lawsuits.

OPEC is often referred to by its common name. No, not “The Organization of the Petroleum Exporting Countries”, the other one - “The OPEC cartel”. Here, from Chapter 1, Article 2 of the OPEC charter:

A. The principal aim of the Organization shall be the co-ordination and unification of the petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and collectively.

B. The Organization shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations.

C. Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on their capital to those investing in the petroleum industry.

Sure, they mention, in passing, the “economic and regular supply” for consuming nations, but their prime purpose for existence is to ensure their own well being. And everyone, with the exception of those impressed by this symbolic populism in Congress, knows this. The situational congressional populists themselves even know it.

I was initially left wondering what jurisdiction the US Congress and court system has on this matter. There isn’t an international law of which I’m aware that forbids cartels, even those which blatantly (and transparently, in OPEC’s case) seek to control price via production changes.

Consider as a case study in extraterritorial law enforcement the divergence between US laws on bribery (verboten) and those elsewhere outside the OECD (winked at in some places, positively ingrained in the social fabric in some others). Solution? Easy - the Foreign Corrupt Practices Act (as extended in 1988 and amended in 1998) attempts, and largely succeeds, to ensure that US persons and issuers of joint stock cannot pay (and therefore, presumably, can’t be forced to pay) bribes outside the US.

But applying such reverse judo to those within the US whose business involves transactions with OPEC isn’t so simple. If the government were to try clamping down on the buyers of OPEC oil, it would crush the US & world economies, long before it motivated change on the part of OPEC. It would likely be a massive failure, even as it separately had the desired effect. And perhaps worse, if OPEC blinked, and Congress’ effort didn’t fail, how would the US be any better than Hugo Chavez, another well known expropriator of others’ property?

Changing antitrust laws probably seemed like a great idea, until one realizes that the targets of such legal maneuvers are not subject to US law, being themselves sovereign states. So Conyers took it a step further, proposing the removal of sovereign immunity in an attempt to extend US law internationally. This is clearly bad policy, as the administration points out,

…because such suits could spawn retaliatory measures and lead to oil supply disruptions and an escalation in the price of gasoline, natural gas, home heating oil.

Just what we need - more oil supply disruptions, and the price eruptions that go with them. Thanks, Mr. Conyers! Assuming the Senate is equally so ill-advised as to attempt economic alchemy, Bush will surely pull out his veto sword for the third, count ‘em, third time. Won’t he?

In that same article, there was a vague hint of light near the end:

“Increased crude oil prices have played a relatively minor role in (the recent) increase in retail prices,” William Kovacic, a member of the Federal Trade Commission, told Stupak’s subcommittee. He said the price of benchmark West Texas crude increased no more than 15 cents a gallon over the last three months, while retail gas prices jumped 80 cents to 90 cents a gallon, depending on location.

But it was quickly overwhelmed by the acrid smoke of more economic illiteracy from Rep. Bart Stupak, of Michigan:

“Big Oil is often quick to blame world crude oil prices, but that argument doesn’t appear to be the full story,” said Stupak.

“While consumers pay record prices, oil companies are making record profits,” said Stupak. Refinery profits have jumped sharply to as much as 70 cents for every gallon of gasoline produced, he said.

No kidding? He’s saying that crude oil prices don’t appear to be the full story? Of course they’re not - once the oil is extracted, it has to be turned into gasoline and other byproducts. “Big Oil” knows this, just as Stupak does. And the economics behind that aren’t linearly related to the price of the inputs. Supply and demand play a huge part, and the availability of refinery capacity hasn’t exactly been steady this year. As an example, see the Reuters story from last Thursday, entitled “Oil surges to $70 on U.S. gasoline concerns“.

Despite record gasoline pump prices above $3 a gallon, there has been no let up in robust demand in the world’s top consumer.

That increase in demand, particularly in advance of the “summer driving season” starting Memorial Day weekend, coupled with refinery and pipeline disruptions is easy to pinpoint as the main driver in gas prices. (How that would drive the price of oil up escapes me just now, but if I’m eventually able to attribute rational basis to the Reuters headline writer, I’ll make an addendum to this piece.) If supply of refinery capacity increased along with the demand, price would stay steady, given steady input pricing.

But over the last 10 years, according to the US Energy Information Agency, refining capacity has increased from 15.6 million BPD in March 1997 to 17.5 million BPD in February 2007. That’s roughly 1.1% per year, and has come without the completed construction of a single new refinery in more than 30 years, relying instead on capacity upgrades at existing facilities, and even then at a rate too low to keep up with demand growth. Why? The cost of upgrades, let alone brand new plant, is out of control. From an Apache Corp report in March, 2007:

Many refiners now express reluctance to invest in expensive upgrades. Bruce Smith, Tesoro’s chief executive officer, noted recently that industrial development in India and China have forced materials costs (such as steel) upward, which in turn has pushed refinery construction costs higher. In some instances, costs have doubled from original bids.

While the latest figures as of this writing available at the DOE are for 2004, even then the daily demand for distilled oil products exceeded 20 million BPD. Stupak’s not alone in thinking the market’s rigged - the San Francisco Chronicle’s March 9 2007 story, “Refinery profit margins double in West“, tried hard to make the case that refiners in CA and elsewhere were “pulling an Enron”, by withholding supply in order to increase prices. Read the entire article, however, and both the refiners and the California Energy Commission make clear that there’s no incentive for them to do so.

So, among many factors, there’s your problem, Messrs Conyers and Stupak. Why not just force the US refiners to build even more capacity? Or force those greedy souls in China and India to quit competing for commodities that refiners need in order to build refineries affordably? Doing either would make precisely as much sense as pretending to force OPEC to quit being OPEC.

Bookmark to:

Today’s WSJ, in the Business Technology section, juxtaposes two pieces on the hypergrowth of digital information, discussing its reasons, its effects, and some responses to the growth.

The first piece is a straightforward and informative mini-whitepaper, entitled “Cutting Files Down to Size“. It mentions the efforts of Chevron and Credit Suisse to control their information, primarily through implementation of new tools, new methods, and new employee work habits. There’s something about an information base that’s presently 1.2 petabytes in size, potentially growing by 57% per year, that can focus the minds of management. Add to that the million email messages per day that the 59,000 employee Chevron claims to process, and you’re talking some serious data. So much data, perhaps, that’s it’s not even possible to glean the information from it. A veritable flood.

The primary solutions discussed are conceptually simple:

• Get people to pay attention to the amount by which they’re increasing the deluge
• Put systems in place to eliminate redundancy, such as using Microsoft’s well-reviewed SharePoint server, ensuring that even the worst PowerPoint slide decks are only stored once
• Admitting, and getting data creators to admit, that not all information is equally valuable

All excellent steps, though both expensive and difficult to implement. Totally aside from the grotesque knock-on effects of continually increasing technology infrastructure to store all new information, the real benefit from such efforts is to remove potential sources of background noise; the unimportant, the duplicative, and the no-longer-operative. “Data” is both easy and not intrinsically valuable - it’s “information” that’s both difficult and valuable, and too much data can obscure the information. Best of luck to the contestants in slaying their particular dragons.

The companion piece, on the same page, in Lee Gomes’ “Talking Tech” column was the more intriguing of the two. Entitled “Computers Should Be Taught To Let Certain Memories Go“, it contained an interview with Harvard KSG professor Viktor Mayer-Schoenberger, and was among the more thought-provoking pieces in the entire day’s paper.

Mr. Mayer-Schoenberger’s thesis is this:

Human beings … weren’t designed to remember everything we ever learned, and sometimes are better off when we forget. Computers, he adds, should as a result be taught to let some memories go.
…
We are biologically hard-wired to selectively remember. But in moving into a digital age, we are now surrounding ourselves with tools that have inversed (sic) that.
…

How does this make life different?

In the predigital age, we might have called someone who knew a person we were interested in learning about, got them to tell us about the person. And we would get a quick picture — but not a complete and comprehensive picture of each and every piece of communication or behavior that the person did over the past 20 years. I think we have lost something by moving from that sort of short encapsulation toward a complete picture that provides us with all the details, the sort that over time, we as a society, and as human beings, tend to forget.

But what’s the problem with that?

Things that happened 10 or 15 years ago might have happened to a different person. Therefore, we should put less weight on what we did 15 years ago than we would do now. In the past, our brains did this automatically for us by forgetting it. But we haven’t been able to develop another evolutionary method, another method by which we can weigh things that happened further in the past differently from those that happened more recently.

(ellipses mine)

Interesting theory, and one that makes some rational sense. I can’t speak for anyone but myself on the subject, but I’m surely not the same person today as I was 15 years ago, and would want any judgment of me weighted more on the current me than the one from decades ago.

The (mild) shocker in the piece, however, was this, his prescription for a solution:

My proposal is that we have a law that mandates that software coders build into software a better ability for people to let their digital tools forget, if they so wish. Right now, both Windows as well as Mac OS have a huge amount of meta data that they keep track of for each file that we use: “Date Created,” “Owner,” and so on. So I suggest that we add another type of meta data: “Expiration Date.”

Conceptually, he has a point - that would be at least a potential solution to the problem he’s laid out. Why the rush to what I can guarantee would be massively ineffectual legal efforts, I wondered? For starters, I presumed it’s because he’s an associate professor with Harvard’s Kennedy School of Government, whose faculty, perhaps by definition, thinks more abstractly and less rationally than, say, Harvard Business School’s must. Then I visited his faculty page at KSG:

…He advises businesses, governments, and international organizations on regulatory and policy issues. He holds a bunch of law degrees, including one from Harvard, and an MS (Econ) from the London School of Economics.

That explains it. Ignoring any questions about how many law degrees one can effectively use, the “bunch” he holds appear to have been enough to outweigh any pragmatism learnt at LSE.

Addendum - 5/14/2007 Having read Dr. Mayer-Schönberger’s paper, Beyond Copyright: Managing Information Rights with DRM, it’s clear that his definition of the problem and the solutions that can mitigate it don’t translate well into a “20 questions” format.

Digital rights management is, as the title indicates, at the heart of his thinking, and for anyone who puckers at the thought of DRM, his paper provides an excellent antidote to reflexive rejection of the concept.

I thank the professor for pointing me to the paper, and am better informed for having read it.

Bookmark to:

…and once again, I find myself astounded by the institutionalized idiocy of the Transportation Security Administration.

Thanks to Richard Reid, for instance, I still get to experience the silly waste of time inherent in removing my shoes and running them through the scanning equipment. Thanks to the efforts of the 21 alleged terrorists in the UK during the summer of 2006, passenger screening personnel still get to inflict the silly waste of time inherent in depriving passengers of any liquid or gel not contained in a properly sized receptacle, or that receptacle itself not contained in the proper 1-quart see through bag. (See also this item on the Department of Homeland Security’s designation of an entire state of matter as a national security risk)

A screener told me yesterday, with no small hint of pride, that, Yes! We still check all passengers’ shoes! This, in sleepy little Myrtle Beach, SC, where many, though not most, of the flights are turbo-prop or 57 seat commuter jets with presumably low value as flying projectiles, and even lower value as targets for suicide bombings.

The experience reminded me of the many instances in which Bruce Schneier has had occasion to comment on the misguided nature of our government’s reaction to events, including its apparent fetish for adding every new terrorist’s trick to the permanent list of reasons for inconveniencing the traveling public, while adding no safety to the equation at all. Zero. I would direct the curious reader to this list of articles on Mr. Schneier’s site for a thorough review of all that’s wrong with the manner in which our bureaucratic overlords maintain their ridiculous pretense to be adding to our security. He’s rightly called it “Security Theater”, among other things.

At the time of this writing, the link just above produces a list of 244 such articles. They cover the failures of security, the knee-jerk TSA reactions to events, the useless political correctness and abuses of power inherent in current process, and the arguably unconstitutional restrictions on rights to redress for incorrect blacklisting or commentary about the process as you’re having it inflicted on your person. Add to this the gaping productivity hole (estimated at $10 billion/year and up) left by the process, the passengers’ costs for security (you didn’t think the airlines were absorbing that, of course), and factor in a rational cost/benefit analysis (even under the assumption we wanted to guarantee that no person ever died except from natural causes) and it seems clear that security is not just irksome - it’s poorly and stupidly implemented.

Luckily, it’s not yet illegal to parody the process while away from airports.

Bookmark to: