Monday, July 29, 2002

Facts? We Don't Need No Stinkin' Facts!

The Tribune ran an editorial last Sunday attacking Arizona Attorney General (and candidate for governor) Janet Napolitano for two mistakes in her handling the Supreme Court's recent decision holding the Arizona death penalty unconstitutional. The first was appointing a commission to make a recommendation what to do, which the Trib said showed a lack of leadership, and then second not working on crafting a legislative solution. Problem is, both statements are wrong. Rather than run a correction, the Trib ran my column. I guess it's like the WSJ editorial page, where they print a letter a couple of days later that points out that the original editorial was totally incorrect, and somehow the reader has to sort it out.

There's some background here; Matt Salmon has made a career of making inflammatory charges against Napolitano that don't pan out, but there's never any criticism or downside when he can't back up his claims. By my count, which includes a rather vicious claim about a 1996 criminal investigation, and the fairly-well-publicized attack on Janet for taking a contribution from Enron, this is Salmon's third swing-and-a-miss.

The Enron contribution flap is illustrative. Salmon attacked Napolitano for taking a contribution "from Enron," when Salmon himself had gotten a $500 contribution from Enron's PAC for his congressional campaign committee. So both papers covered the boomerang on the charges; Salmon fired his opposition researcher. The more interesting fact, not fully vetted, is that Napolitano's supposed Enron contribution was a contribution from a New Mexico resident who, in 1998 during Napolitano's campaign for AG, happened to work for Enron. It wasn't a PAC or corporate contribution, but rather from a relatively low-level employee. That was Salmon's claim of an "Enron contribution." So even if the boomerang of Salmon's own Enron contribution hadn't leveled the charge, it was pretty bogus to begin with. But none of this backstory will make it into reporting about whatever Salmon's latest bogus charge happens to be.

In other news, the Arizona Republic came out against the death penalty Sunday. Jim Bush, Republican uber-lobbyist, comes out against the death penalty. Hey--did I wake up in Oregon or Massachusetts or something?

East Valley Tribune, July 28, 2002

The Tribune editorial page likes Matt Salmon so much, it wants to make the same mistakes--and get the same free ride--as Matt does for his sloppy research. Apparently, The Tribune is an official Napolitano free-fire zone. Hurl false charges against her, and if you’re wrong, who cares?

In baseball, you get three strikes and you’re out, but when you play “Attack Janet in The Tribune,” being wrong means never having to say you’re sorry.

The latest example came in last Sunday’s editorial, parroting a campaign charge by Salmon faulting Napolitano’s handling of the forthcoming fix to Arizona’s death penalty statute, just declared unconstitutional by the U.S. Supreme Court--reversing its 1991 decision upholding the same statute.

Napolitano’s Capital Case Commission, a panel of prosecutors, defense attorneys, judges, and citizens, debated the issue, and, surprisingly, voted to recommend either abolishing the death penalty or putting it to a public vote.

Salmon attacked Napolitano for not “controlling” the opinions of the people on the panel. I didn’t know thought control was a test of leadership, but we now have confirmation that Matt Salmon takes pride in refusing to learn anything new.

For its part, The Tribune attacked Napolitano based on two easily-checked but flat-out wrong statements. First, the editorial said “Napolitano formed a commission to look into the matter”--meaning the make-the-statute-constitutional fix. Wrong.

Napolitano actually appointed the commission in the summer of 2000--two years ago--in response to studies showing extraordinarily high rates of reversals in Arizona capital cases, and a cluster of high-profile cases nationally where innocent people had received death sentences. Since 2000, the commission has discussed many aspects of capital cases in Arizona, including the recent statute--supported by this paper--prohibiting executions of the mentally retarded.

The commission wasn’t formed for “this matter”--but the members of the commission did debate the issue, and recommended a public debate and vote, a recommendation that The Tribune actually might endorse if it didn’t get in the way of supporting Salmon.

Second, the editorial blasted Napolitano for relying on a citizen committee for a legal fix for the statute. Instead, she “could and should have charted a legislative course . . . and then recommended that Gov. Jane Hull call a special session.” Wrong again--because that’s exactly what Napolitano did.

In reality, the Attorney General’s Office has been working on a revised statute with Gov. Hull, legislative leaders, prosecutors, and defense attorneys for weeks. And the governor may call the special session to fix the death penalty as soon as this Tuesday, if the legislative leaders line up the necessary votes.

As reported by Robbie Sherwood in The Arizona Republic last Wednesday, “House Speaker Jim Weiers”--a Republican, mind you--”hopes for widespread support for the changes, drafted by Attorney General Janet Napolitano and county prosecutors” to amend the death penalty statute.

If anybody failed a test here, it’s last Sunday’s editorial, which was based on demonstrably false claims, statements so far off the mark that most newspapers would have run a correction. Maybe Salmon still has crummy opposition research, but that doesn’t excuse The Tribune.

The truly weird part is that the editorial attacked Napolitano because the Capitol Case Commission raised doubts about the death penalty--a debate this paper has encouraged. As the editorial noted, “The Tribune has voiced concerns about the death penalty repeatedly in these pages. There is a rousing debate throughout the land over whether capital punishment should be abolished.”

Huh? Napolitano allegedly failed a test of leadership because she couldn’t prevent interested citizens from discussing an important public issue that The Tribune itself wants to debate?

Stop reading those editorials, people. If you find them convincing but Matt Salmon doesn’t, you’d better watch your back.

Monday, July 22, 2002

Sex vs. Money

After last week's rather dry discussion of stock options and accounting, it was time to have some fun with the "It's Bill Clinton's fault" people. Don't forget to sing along when you get to the 9th graf. I'm working on another song, with the line: "Who are you going to believe, me or your lying IRA?"

Looking to George Bush to protect the average American's investments is like looking to Bill Clinton to protect a woman's virtue. Not the first person you'd choose for the job, and if it turns out OK, it's only because you're watching him really, really closely.

Here's the link to the column on the East Valley Tribune website. And if you want the same argument in cartoon form, check out Tom Tomorrow.

East Valley Tribune, July 21, 2002

Moral relativism is back--because that’s where the money is!

And we’re not just talking about how “in the corporate world, sometimes things aren’t exactly black-and-white when it comes to accounting procedures,” in the not-exactly-stirring words of George W. Bush. We’re talking about looking for the “root causes” of crime and unethical behavior. A way for bleeding-heart conservatives to shirk individual responsibility and shift blame--at least for corporate crime:

It’s Bill Clinton’s fault!

I just love blaming today’s business scandals on the moral failings and “climate” set by Bill Clinton. If you’re gullible enough to swallow that, go buy some WorldCom stock in advance of Monday’s bankruptcy filing.

Apparently, we can’t hold these book-cookers and stock-pumpers fully responsible for their own behavior. Instead, blame Bill. Sure, on the way up, these executives were take-charge-guys, absolutely indispensable to their companies, fully responsible for all success--and compensated accordingly. But failure? That’s not their department.

Better look elsewhere. Like Arkansas.

We’re talking about rich, well-connected, and exceedingly well-lawyered malefactors, so conservatives who usually argue the other way--John Walker Lindh is guilty, and therefore so is all of Marin County, California--shift blame for this tidal wave of accounting scandals from the perpetrators.

Instead, these hard-nosed, shareholder-value-paramount, take-no-prisoners masters-of-the-universe business types can avoid responsibility. They caught some sort of ethical flu from the Philanderer-in-Chief.

If these business ethics disasters are Clinton’s fault, then isn’t society to blame? I await a business school production of West Side Story, when Enron’s Jeffrey Skilling and Ken Lay, Qwest’s Joseph Nacchio, WorldCom’s Bernard Ebbers, and AOL Time Warner’s Gerald Levin belt out slightly revised lyrics:

Gee, Officer Krupke, we’re down on our knees
We’re just rich CEOs with a social disease
We don’t know accounting, what were we to do?
Gee, shareholders--Krup you!

The right wing must be in absolute awe of Clinton’s power; it’s just amazing how one man can affect so many, for so long, through his personal example. Of course, Clinton hasn’t been president for about two years, but he’s still the moving force of the entire universe.

On the other hand, Dick Cheney hasn’t headed Halliburton for about two years, so he can’t be held responsible for the results of his bad decisions, lackluster leadership, and questionable corporate accounting.

So if the SEC answers those questions about Halliburton’s accounting by forcing the company to restate its inflated earnings, it won’t be Dick Cheney that’s fully responsible, but rather the Clinton moral climate. You certainly can’t expect somebody with merely the ability and morals of a Dick Cheney to withstand the overwhelming force of the “ethical tone” set by (gasp!) Bill Clinton.

Meanwhile, our first “M.B.A. president,” has some problems meeting today’s challenge of restoring confidence in business. President Bush may lack some of that “moral standing” to attack corporate shenanigans like insider loans to buy shares, dubious off-balance-sheet accounting to generate profits and hide debt and losses, and failures to comply with insider trading rules--because he did them all.

Poor George W., facing a national problem on which he’s spectacularly ill-suited to lead. From the moment of his birth, he’s benefited mightily from being in the right place at the right time with the right connections. But nobody trusts business insiders anymore, especially ones lecturing on “corporate responsibility.” At least Clinton never gave a speech in front of a backdrop emblazoned “marital fidelity.”

Meanwhile, I’m watching the Dow and the consumer confidence index drop, and waiting for the first Democrat to frame the 2002 elections by quoting Ronald Reagan: “Are you better off now than you were two years ago?”

Yeah, I know Reagan said four years ago, but these days nobody wants to wait that long for anything. Live by self-interest, die by self-interest.

Monday, July 15, 2002

How To Succeed At Business Without Really Achieving

I saw a friend this morning who said that he just doesn't enjoy my business columns as much as the political ones; I just don't let loose with enough zingers when discussing accounting, I guess. Or he didn't notice the "Bush bear market" comment. The New York Times ran a similar op-ed on Friday by Walter Cadette, but my editor and my email server both know I sent off my column on Thursday evening before reading it.

East Valley Tribune, July 14, 2002

One great myth of the last decade was that giving top executives huge stock option packages would align their interests with the shareholders’. If the stock did well, management did well; if the stock didn’t do well, management wouldn’t do so well--at least theoretically.

There are several problems with this theory. In a boom market, options reward, quite handsomely, mediocre or even inferior performance. Option plans usually consider only the company’s stock price, not its performance relative to competitors, or to the market. If the average stock rises by 15 percent, then below-average performance of 10 percent still gets underperforming management wonderful rewards.

It’s also doubtful if companies, in the Bush bear market, will keep insisting on strictly linking executive compensation to share price. Already, boards are basing executive compensation decisions on loosely-defined “other factors.”

Even if the stock price tanked, executives are get rewarded--for internal reorganizations, cutting costs, or other allegedly worthy corporate goals. However, using those other criteria, by definition, weakens the connection between executive compensation and shareholder value, suddenly a good thing now that executives dread taking home merely their salaries.

Worse, many companies will “move the goalposts.” Employees may have options with “underwater” exercise prices, well under the current market price. Companies have started re-pricing previously-issued options, wiping out bad years, letting management off the hook, and giving them essentially new options.

Senior executives claim that they need to reprice options to keep valuable employees. But the employees who benefit the most are the ones with the most options, those same senior executives. Repricing options is the original “heads I win, tails we flip again” gimmick; management wins big if the stock price rises, and if it falls, they reset the game for another coin toss.

(Watch this dodge in action with the Business Roundtable’s reluctant endorsement of making all stock option plans subject to prior shareholder approval. Companies will start adopting plans, after shareholder approval, which allow the directors to reprice options issued under the plan without shareholder consent.)

But the most significant problem is that unlike a shareholder, an option holder shares only in the potential gain, and not in any risk. If the share price rises, both the shareholder and the option holder indeed win. However, if the share price falls, only the shareholder suffers; the option holder loses nothing.

Sure, management may miss a wonderful windfall but, unlike their shareholders, option holders don’t lose their investment. Management can wait for another, better day to exercise those options, or leave to pursue “other personal interests” or some other euphemism. But they haven’t lost any money--unlike the company’s actual owners.

Options give senior managers incentives to place risky bets, to shade the numbers, and to push the boundaries of legal requirements and shareholder obligations, because the rewards for success are so fabulous and the penalties for failure--at least for most--so minimal.

It’s like playing the lottery each week with the shareholders’ money. Management gets much of any winnings, but if the company doesn’t win, they just buy another ticket, again with the shareholders’ money. And the bizarrely favorable accounting treatment of options, which allows company to deduct them when paying taxes but ignore them in announcing earnings and profits, means that management only need disclose their lottery ticket purchases in an annual financial statement footnote.

By giving a huge share in the upside but no risk in the downside, today’s option culture gives management tremendous financial incentives to make risky moves, to gamble with shareholders’ money. It’s “heads I win, tails you lose;” I may miss out on a huge gain, but only you risk losing anything.

That’s no recipe for aligning management’s interests with shareholders’; it’s the recipe for today’s business disasters.

Tuesday, July 09, 2002

I think the more interesting comparison to Harken Energy experience is with Hillary's treatment by the media, not Bill's. After all, they finally nailed Bill on something, but they've never gotten Hillary. But what if adultery, like corporate accounting, isn't exactly black-and-white?

Bush gets a bye on lucrative and questionable deal

East Valley Tribune, July 7, 2002

Let's imagine that Hillary Rodham Clinton, before becoming First Lady and while Bill Clinton was governor, became a director and shareholder of (let's call it) Arkansas Energy.

Arkansas purchased her company--call it Whitewater Petroleum--for $2 million, even though Whitewater was losing money and had millions in debt. Arkansas's CEO told a reporter he paid that much because he wanted Whitewater's prime asset: Hillary Clinton.

As an Arkansas director, Hillary served on its audit committee at a difficult time. Having just gotten listed on the New York Stock Exchange, Arkansas needed good news to attract investors. Unfortunately, despite contrary promises, the company actually was losing money.

So Arkansas turned its losses into gains by selling a subsidiary--call it Rose Oil--to corporate insiders, using mostly money advanced by Arkansas itself. Rose's sales price was $12 million, with Arkansas loaning the purchasers $11 million. Arkansas claimed an $8 million gain, which transformed its operating loss into a profit.

However, accounting rules say you can't make a profit by essentially selling something to yourself. Despite approval by Arkansas's auditors--and Hillary's audit committee--the Securities and Exchange Commission eventually forced Arkansas to restate its results. Arkansas couldn't book profits on the Rose sale until the insiders actually repaid the loan, which changed that reported profit back into a loss.

The SEC investigation took several months, and before the earnings restatement, Arkansas's stock--buoyed by those reported but phantom profits--stayed buoyant, too. Before the stock tanked, Hillary sold the majority of her shares for nearly $850,000.

When corporate insiders sell, federal law requires prompt reporting. But Hillary neglected to disclose her stock sales for some 34 weeks, until after the drop in Arkansas's stock price. The SEC staff concluded in an internal memorandum that Hillary had violated federal securities laws, but by this time--with (ahem) a close relative as president--the SEC did nothing. The agency closed the investigation, but made it clear that it wasn't an "exoneration" or decision on the merits.

The tardy failure to disclose her insider stock sales first surfaced back in a gubernatorial campaign, when Hillary said that she had filed the report but the SEC had lost it. But a few years later, with the national media suddenly interested, her tale changed; abandoning the "SEC lost my homework" excuse, Hillary then claimed that late disclosure of the insider stock sales was simply a meaningless oversight--and that everything was investigated at the time, and she was cleared, so go away, there's nothing new here.

If it were Hillary Clinton, The New York Times, much less The Wall Street Journal, Rush Limbaugh, and this newspaper, would stay on the story like white on rice. You'd have trouble counting the number of congressional committees investigating. But unless you read Paul Krugman's New York Times column, you've heard nothing about this tale, because it didn't involve Hillary Clinton; instead, it involves George W. Bush.

In 1989, as a director of Harken Energy, Bush sold his shares during the SEC accounting investigation, didn't disclose the sales until 34 months after the required date, saw the SEC (while his father was president) drop the investigation, and claimed during his 1994 campaign for governor that the SEC lost his report but is telling a different story now.

For Hillary, it would be a national scandal. For George Bush, nothing. Are federal securities laws less significant than Arkansas land deals? Do we hold George Bush to lower standards than Hillary Clinton because he's not as smart or something? Or do only women, or Democrats, have to make their money honestly?

Maybe I'm just partisan, looking for any excuse, no matter how old or flimsy, to attack George Bush. But all those GOP investigations of Hillary Clinton were principled and important.

Yeah, right.

Monday, July 08, 2002

Weighing In on the Fires

This column ran on a Monday, instead of Sunday, because in late-breaking news Friday, it turned out that there actually was an environmentalist lawsuit, filed by the Center for Biological Diversity, over a forest-thinning project in the Apache-Sitgreaves National Forest. So I had to re-write three paragraphs, because I'd been told by my friends at the Sierra Club (imagine, getting burned by the Sierra Club, if only metaphorically) that the only lawsuit had involved a site near Flagstaff, well out of the fire zone. I get countless emails from the Center for Biological Diversity, just not the one I actually needed for a column until after I wrote it. Luckily, Bob Schuster was able to insert my revisions, but not until Monday; the Sunday paper actually prints on Saturday morning.

My chagrin lasted about three days, because the following Wednesday, the Arizona Republic reported that the Hull administration pressed the Forest Service, successfully, to stop a prescribed burn in the fire area due to alleged health effects. (Our governor, Jane Hull, had been accusing environmentalists of causing the fire by excessive litigation until her own efforts came to light. Now it's too difficult to draw cause-and-effect conclusions.) It turned out that the Hull administration wanted to stop the fire-prevention project entirely due to complaints by nearby residents, but the Center for Biological Diversity lawsuit didn't object to thinning, but filed suit because they saw the fire-reduction project as a ruse to log older-growth trees; they'd withdrawn their objection to thinning the smaller trees. So now that Hull can be attacked for her anti-fire efforts, we've gone on to other matters here in Arizona. Of course, with the arrest of a suspect for starting the Rodeo fire, both fires were started deliberately, and the whole root-cause argument has been kind of mooted anyway. (My editor did cut the line that Hull knows as much about forest fuels as about alt-fuels, and either way we get burned.)

East Valley Tribune, July 1, 2002

Here’s the upside to blaming the Rodeo-Chediski fire on environmentalists. If facts this skimpy and causation this confused justify that claim, then conservatives better watch for what gets pinned on them .

Blaming the enviros means ignoring a century of fire suppression, leaving forests brimming with fuel. Several years of drought have resulted in current tinder-dry conditions. Historical records indicate that Southwestern multiyear droughts are the rule, not the exception.

Cattle grazing--not just “overgrazing”--eliminated the vast grasslands formerly key to forest ecology. University of Arizona professor Thomas Swetnam’s tree-ring studies show that prior to this century, the typical Arizona ponderosa pine forest burned once or twice per decade. The grasslands carried these frequent, lower-intensity fires, with flames under 3 feet, which prevented buildups of dead branches and other fuels. But today’s fires leap into the crowns of mature trees--trees mature enough to resist lower-intensity fires, but no match for an inferno.

Logging practices haven’t helped, either. The most valuable timber comes from the fire-resistant, old-growth trees, best able to withstand regular fires. The most dangerous trees, the small-diameter ones (12 inches or less), have the least commercial potential. And “mechanical harvesting” techniques often leave more fuel scattered on the forest floor and jeopardize adjoining tree stands.

The fire patterns of the past centuries changed because of people settling the West, bringing their cattle last century and building their dream homes in this one. As Dr. Swetnam noted, people love living in pine forests, just as they love living on picturesque flood plains, coastlines, and earthquake faults. People want to live among the trees, not remove them from near their homes. Fire-resistant metal roofs just don’t look as nice, and nobody wants “prescribed burns” in their neighborhood.

Gov. Jane Hull claimed that lawsuits have stopped the Forest Service from preventing fires. Unfortunately, according to the General Accounting Office, of 1,671 Forest Service fire-prevention projects nationally, a grand total of 20 got challenged in court--not always by environmentalists, but also by industry or tourism interests, or by neighbors who wanted the project not in their back yards.

Only one in Arizona, which would have cleared both large and smaller trees from a largely previously-logged area, faced court challenge. Anyway, litigation could play no real role in the Rodeo-Chediski fires, both of which started on an Indian reservation, where tribal sovereignty exempted activities from environmental lawsuits.

But never mind the facts, for some people it’s just too enjoyable to blame the enviros, as if they’ve been running things and Jane Hull, Jon Kyl, George Bush, and the long-standing GOP majorities in Congress and the state Legislature have no responsibility for anything.

If opposing commercial logging of large, old pines in remote areas, instead of culling the smaller, more flammable trees near communities, and one lawsuit involving some 10,000 acres (out of 300,000) largely previously logged are enough to condemn the environmentalists, then aren’t the legislators, president, and governors who haven’t sufficiently funded the Forest Service and the new National Fire Plan even more responsible?

If fires are a problem caused by a century of misguided policies, have many root causes, and will take much time and money to solve, then isn’t each member of Congress, which has increased the responsibilities of the Forest Service without increasing its resources accordingly, actually more responsible?

It’s going to take money, folks. There’s no way to fix a century’s worth of problems with proceeds from one-shot timber sales. Is it more important to save the forests, or to abolish the estate tax? Guess which matters more to our delegation, the forests or multimillion-dollar estates.

Sure, let’s hold environmentalists accountable. Just make sure to hold everybody else responsible accountable as well.