Friday, November 22, 2002
In their December 2 and December 23 "By the Book" columns in the Wall Street Journal, Art Berkowitz and Richard Rampell discuss current "rules vs. principles" accounting debate, that is, whether audits should be based on fixed accounting rules or on general accounting principles. My comments to them are attached.
122402 Rules or Principles.pdf
Bazerman, et al writing in the November 2002 issue of Harvard Business Review contend that auditors are biased and that this bias is the source of poor quality audits of corporate financial reports. [See, Why Good Accountants Do Bad Audits, Harvard Business Review, Vol. 80 No. 11 (November 2002).] I continue to hold that the answer lies in separating management from certifying the integrity of financial reports. My Johnny-One-Note response is attached.
113002 Comments on HBR Audit Quality Article.pdf
William O. Douglas, who later became one of the great justices of the Twentieth Century Supreme Court (whether or not you agree with him, he was a powerful intellect and a forceful proponent of his views), was the first Director of the Securities Exchange Commission. Shortly before joining the SEC, Douglas wrote an article for Harvard Law Review, Directors Who Do Not Direct. It is a very interesting, if somewhat depressing read. My comments are attached.
112102 Douglas - Directors Who Do Not Direct.pdf
Sarbanes Oxley Proposals to Regulate Attorney Conduct
Should attorneys have a "loyal disclosure" obligation outside the organization?
111202 Harris Article Introduction.pdf
Should in-house counsel have a claim for retaliatory discharge?
111202 Sarbanes Oxley Retaliatory Discharge Introduction.pdf
111202 Social Obligations of Corporate Counsel.pdf
The SEC Sarbanes Oxley Rulemaking Proposal is out. One of the more interesting comments that has been submitted to date is attached.
Sarbanes Oxley Corr 112502.htm
Corporate Financial Reporting
Correspondence with Brad Delong - former economic advisor during Clinton Administration.
posted by Michael 5:27 AM
Monday, November 18, 2002
May 17, 2003 Theological Update. I address a number of questions and comments I have received on my Easter Message and Post-Easter Message by posting compiled correspondence with a friend.
April 27, 2003 A Post Easter Message
An analysis of John 20: 23. If you are a believer comfortable with the prevailing upbeat Protestant theology, you won’t want to read this.
Preach teach encourage.pdf
An Easter Message
Ever since I posted the articles from Wired and Atlantic referenced below, I have wanted to write on theological topics, but have never found the time. My Easter Message is a beginning.
An Easter Message.pdf
Wired Magazine Articles
Fascinating articles in Wired Magazine on recent intellectual trends away from materialistic determinism and towards a spiritual view of the most significant questions of the origins of the Universe and the purpose of life.
Wired 10_12 The New Convergence.pdf
Wired 10_12 A Prayer Before Dying.pdf
Wired 10_12 The Pope's Astrophysicist.pdf
While these articles are fascinating, they are depressing to the extent that they reflect a prevailing and shallow theological analysis.
Atlantic Monthly - 1942
The most important event during the Twentieth Century was, almost without question, the Second World War. The war marked the end of the colonialist / mercantilist era and also marks the beginning of modern thought. With regard to the latter, humanity spent much time during the war years trying to imagine life after the war. One of the common questions was the future of religion generally, and the Christian Church specifically. This article from the Atlantic Monthly in October 1942 is quite interesting:
Atlantic 1942 - Is Church Obsolete.pdf
posted by Michael 5:54 PM
Sunday, November 17, 2002
ARTICLES OF INTEREST
May 16, 2003 My comments on the remarks of Paul Krugman, Princeton Economist, in his Rolling Stone interview.
051603 Krugman - Rolling Stone.htm
May 15, 2003 Dave Mason of Butler University responds to my comments on his article on the parallels between the Iraq War and World War I and, always having to have the last word, I respond to him.
051503 Mason Response and MDS comments.htm
April 28, 2003 Correspondence to Samantha Power and Kira Brunner.
The text should be self-explanatory. For your convenience, I have highlighted in blue the material that is not particularly repetitious of what I have written on the Iraq War in the past.
042703 Power-Brunner Correspondence.pdf
Iraqi Oil and Iraqi Assets for the Iraqis
The war is won. That is the easy part. Our leaders are now focused on what the government of post-war Iraq should look like. They have this focus because government is what they know and, “When your tool is a hammer, all problems tend to look like nails.”
More important, and more difficult and expensive, will be the successful integration of Iraq into the world economy.
This is more important, because unless Iraq’s economy can be diversified and the current wealth disparity eliminated (so that there are no longer a few Iraqis with vast wealth from the oil business and vase masses of poor Iraqis who still tend goats), the ethnic rivalries that brought a monster like Hussein to power and that threaten the peace of the whole region will remain. The lives sacrificed in the war will have been sacrificed in vain.
This is more difficult because of the ethnic rivalries and the lack of a long cultural history of commercial activity under the rule of law. It will prove to be more expensive than the war itself, because restructuring the economy of any country is expensive. Look at what we spent on Germany and Japan. And, Iraq is no Germany. It lacks infrastructure and other key assets.
George Melloan’s recent article in the Wall Street Journal presents some interesting ideas for preserving the oil wealth for the Iraqi citizens and, perhaps, allowing them to share in the economic infrastructure. My comments follow.
042204 Melloan WSJ On Iraqi Oil.htm
Response to George Melloan.htm
World War I Revisited
Professor David Mason of Butler University out here in Indianapolis published an interesting article in a local paper drawing parallels between the events leading to World War I and those that led to the Iraq War. Unfortunately, I do not have a copy of his article to post, but its thesis should be obvious based on my comments to him.
One of Professor Mason’s primary points is that the scope, duration and cost of conflict are difficult to predict in advance or to control once war has started. World War I is certainly an excellent case in point. While I quibble with him on some of the details, Austria-Hungary manipulated the conflict with Serbia that degenerated into the first truly World War, just as the U.S. manipulated the conflict with Saddam Hussein. (Even though I support the war (at least conditionally – see my comments), I see the rationale proffered to the public as disingenuous. The actual reasons for the war are, I believe, even more compelling than the “freeing the Iraqi people, eliminating weapons of mass destruction, and enforcing U.N. resolution” nonsense that government has offered.)
Here are my comments, but I cannot refrain from a few additional comments.
040203 Mason Correspondence.pdf
Now that the outcome of the military conflict is clear, we must “win the peace.” This means keeping our commitment to rebuild Iraq, which must involve more than simply installing a nominally democratic government and fixing what the war destroyed. We must do for Iraq what we failed to do for Germany after World War I – eliminate the macroeconomic drivers that caused the war in the first place.
Iraq must become a First World economy. In some ways, it is among the best candidates in the Mideast to do so. But, Iraq is no Germany. It is a heterogeneous, sectarian, tribal society with long-standing internal rivalries. Rehabilitating Iraq will be more difficult than rehabilitating Germany after World War II, when we finally did what should have been done 25 years and 50 million lives earlier.
If Iraq continues to have an economy based solely on exploitation of its petroleum resources, deposing Saddam Hussein will have been in vain and we will eventually fight another war against another, different tyrant, probably one of our current Kurd or Shiite “allies”. The petroleum-based economy does not provide sufficiently broad economic opportunities for a sufficient number of Iraqis. There will continue to be vast wealth disparity between those who control and profit from oil exports and those who herd goats.
Rehabilitating Iraq requires substantial – and substantive – private sector investment. “Substantive” investment is investment for the long term. This means construction of capital intensive assets, not just big-box packaging plants and warehouses, and investment in human capital through skill development and training, not just the exploitation of a favorable wage structure for unskilled workers.
The conventional wisdom is that the private sector invests in developing countries solely to exploit low wage levels and lax regulatory environments. That is not true. Where there is political stability, the rule of law, and limited risk of expropriation or confiscation, the private sector can, will - indeed, must – make substantive investments. Where these attributes are lacking, however, investment will be exploitive, because that is the only kind of investment that can be justified in light of the risk.
Providing incentives for substantive private sector investment in Iraq will probably require government guarantees from the U.S. and other First World countries. It will probably also require subsidies of various kinds, including the construction or upgrade of basic common infrastructure like port facilities, waste water treatment plants, highways, railroads, etc. Incentives and support will be particularly important in Iraq, because we must encourage investment in Iraqi enterprises, not just facilities wholly-owned by foreign enterprises. There is already resentment in Iraq and across the Arab world of Western influence and presence in the region. Western dominance must be minimized as soon as possible.
Unfortunately, discussion to date has focused on establishment of a democratic Iraqi government, not on the establishment of a successful Iraqi economy. This puts the cart before the horse. Ultimately, the form of government in Iraq does not matter. Iraq will cease to be a threat to peace when its economy provides sufficient prosperity for a critical mass of the population so that sectarian differences and rivalries are minimized. Minimizing the prospect of sectarian violence minimizes the incentives for the government – whatever its nominal character – and the sectarian groups to seek alliances with other countries and cross-national ethnic organizations.
There is an old adage that says that if your tool is a hammer, all problems tend to look like nails. This certainly seems applicable to the discussions over the future of Iraq. Government, of course, thinks that government is the answer. Task forces of bureaucrats are working away on governmental structures, with economic reform rarely mentioned. There is much speculation over who the U.S. is going to anoint as the next leader of the country, but virtually none over what most Iraqis are going to do for a living, or with their lives (other than to oil their AK-47s in preparation for the slaughter of their fellow citizens of different heritage).
Iraq needs a basic manufacturing economy, and, unfortunately, too few people in government know anything about the realities of running manufacturing enterprises. Worse, there is a decided prejudice against manufacturing in our New Economy, particularly among the young intellectual elite (who never worked in a factory, do not know anybody who ever did, and could never imagine doing so). Iraq is not going to be a leader in software, biotechnology or nanotechnology anytime soon.
Without development of a successful economy that provides hope and prosperity for the preponderance of Iraqis, future conflict in inevitable. This is the lesson of World War I and the Treaty of Versailles. The victorious Allies installed the Weimar Republic in Germany, but did nothing to address Germany’s macroeconomic problems (In fact, of course, imposition of reparations greatly exacerbated those problems and accelerated World War II.).
The Business Plan
For almost a year, I have been pursuing an opportunity to acquire gold-standard, next generation inductible gene regulation technology. In a nutshell, this technology allows you take a gene that expresses a particular protein out of a human cell, attach it to a patented receptor, insert it into other mammalian cells, and treat those cells with a patented inducer compound that causes the gene to express the protein.
There is current generation technology that does this, but the receptors and inducers used are not well matched and that causes two problems.
First, the control over expression is poor. Administering the inducer to the host cell (the mammalian cell containing the human gene) is like putting a brick on an accelerator. The gene expresses more protein than the cell can properly process (After proteins are expressed by genes, cells use enzymes to perform additional reactions. These are called "post translation modifications.")so the fidelity of the final protein to the desired human protein is poor. In other words, quality is poor.
Second, the current generation systems allow you to increase expression. They do not stop the human gene in the host cell from expressing protein on its own, a phenomenon called "leakage." As a result, the current generation systems cannot by used to make proteins that are toxic to the host cell (called "cytotoxic" proteins), because the host cell dies from small amounts of protein leaked by the gene before the inducer can be administered. There are whole classes of proteins potentially valuable for cancer treatment, for example, that cannot be made using current generation technology.
The technology I plan to acquire solves both of the these problems and a number of others. If you've read this far, you might want to look at the business plan and the technology summary. And, if you happen to be intrigued by the potential of this venture and have a few million dollars lying around, let me know. ASAP.
030503 RHA Business Plan.DOC
030103 RH Acqusition LLC Business Plan Technology.ppt
Ten Emerging Technologies That Will Change The World
The February, 2003 issue of MIT's Technology Review discusses 10 cool ideas that are supposed to change everything. I've annotated the article with my comments. Frankly, my perception is that these hot scientists work on what is perceived as cool and what can be easily addressed. But for many of the technologies, virtually insurmountable problems - many of them in non-cool areas of the hard sciences and disciplines like mechanical engineering - are ignored. Discussions of "Wireless Sensor Networks", for example, may rake in all the girls and lots of money, but long-standing problems of RF propagation and ultra high frequency circuit design, which attract neither girls nor money, are a brick wall.
10 Emerging Technologies That Will Change the World.pdf
The (Annotated) State of the Union.
Jim Fallows, a former presidential speechwriter, published the text of the State of the Union speech annotated with his comments. I did not even watch the speech as I expected it to be predictable and not enlightening (and I can read faster than George Bush can talk). But, when I saw Jim's comments, I couldn't resist adding my own. Jim's comments are in italics, mine are in red. After recieving this, Jim wrote to say that he agreed with much of what I said, but not my comment about the source of deficits during the Reagan years (That man still inspires such partisanship!). Anyway, I suspect that there are a few other things that Jim doesn't agree with.
The (Annotated) State of the Union.pdf
The Cost of Health Care
The January/February issue of The Atlantic contains an article by Shannon Brownlee providing yet another gloss on the cost of health care problem and what government can do about it. Frankly, the answer to this problem is really rather simple once you understand it. The problem is, nobody wants to do what has to be done. I explain it in my response to Shannon. She responded with an alternative suggestion of equal or greater merit that you won't like either. It's all below.
The Overtreated American.pdf
012703 Shannon Brownlee.pdf
012803 Shannon Brownlee Response.pdf
012803 Response to Shannon Brownlee.pdf
The James Riddleberger Oral Histories
American Policy and the Origins of the 21st Century.rtf
James W_ Riddleberger Oral History Interviews.rtf
Indulge your paranoia.
Everyone speculates about the capabilities of the intelligence agencies of various governments. Attached is a 2000 report to the European Commission on this issue.
I had to save this as text-only because of its size. Email me for a complete copy.
Obviously, this document was not intended for widespread public dissemination. It is not identifed as classified and I obtained it both legally and ethically.
Want to know how fighter planes chase the hijacked aircraft you're flying on? Check out the attached.
NORAD Policy for Hijacked Aircraft.pdf
The History of Tetraethyl Lead. [This is a real screed, but some of the corporate history is interesting.]
History of Tetraethyl Lead.pdf
The New York Times Magazine Series on the World Trade Center. You can find this on the NYT site, but I've put it here for convenience.
The Height of Ambition Part One.pdf
The Height of Ambition Part Two.pdf
The Height of Ambition Part Three.pdf
The Height of Ambition Part Four.pdf
The Height of Ambition Part Five.pdf
The Height of Ambition Part Six.pdf
The Height of Ambition Part Seven.pdf
posted by Michael 6:51 AM
CASES OF INTEREST
Chemtall v ZR Energy
The 7th Circuit recently affirmed a district court decision holding that a succsssor to an employer had rights to enforce a confidentiality agreement protecting trade secrets of the business against a former employee. The confidentiality agreement in question provided that its benefits were to inure to the benefit of "successors and assigns" of the employer, which should have made this right pretty clear. But, the former employee pointed to boilerplate in the asset purchase agreement between the original employer and the successor that put the issue in doubt. The lesson is that in drafting acquisition and divestiture documents, there can be unanticipated land mines in the biolerplate. While the successor ultimately prevailed, the decision could have gone the other way, and it was a very expensive lesson.
Fravel Trade Secret Case.pdf
Boehringer Ingelheim v Schering.
Boehringer prevailed over Schering at trial by demonstrating that Schering’s process for manufacturing a veterinary vaccine infringed a Boehringer patent on a process to create the virus of interest in mammalian cell culture under the Doctrine of Equivalents. The Doctrine of Equivalents has been controversial after its validity was called into question in Festo, at least in cases where there were claim amendments during patent prosecution. Surprisingly, in affirming the trial court decision in Boehringer, the Federal Circuit panel did not mention Festo, even to distinguish it in passing.
Not so surprisingly, Schering essentially abandoned its Inequitable Conduct defense before trial. This reaffirms the limited utility of this defense.
The decision is on the Yahoo groups server as I still can't upload files to this server. ;-(
Coke v Pepsi
A recent decision by the Second Circuit Court of Appeals affirming grant of summary judgment to Coke in Pepsi's antitrust case against it provides a pretty good discussion of the concepts of relevant market definition and conspiracy to monopolize. The decision is attached.Pepsi v Coke.rtf
Georgia Pacific v GAF [I am personally the subject of the leading case in the Southern District of New York on the scope of attorney-client privilege for in-house lawyers. Here's a decision in the case. I will post the text of the decision involving my testimony when I find an electronic version.]
Georgia Pacific v GAF.pdf
The decision in Georgia Pacific has been the subject of numerous articles (including legal ethics guru Stephen Gillers at NYU)and has been cited in many other cases.
The underlying premise of the decision - that in-house lawyers are engaged in a dual role (attorney and business advisor) that outside counsel are not - is simply wrong as a matter of fact. All good lawyers learn their clients' businesses and provide advice on how legal decisions might affect the conduct of the business, They do not merely provide ivory tower advice on theoretical legal questions presented in the abstract, More significantly, the trend to treat in-house counsel differently from outside counsel is unfortunate. This trend is to some extent the result of viewing in-house counsel as employees. For the reasons I discuss in my analysis of the Sarbanes Oxley proposals, I believe that attorneys are not properly seen as employees (other than for administrative purposes) and that non-employee, in-house lawyers with independent professional obligations can serve an important role in improving corporate governance.
My wife has copies of all the puff pieces on my role in the Georgia Pacific case (articles from Forbes, Fortune, the New York Times, the Washington Post, etc.). Email me if you want to see these. The substantive articles are available to those of you who are in my BlogList Group on Yahoo. You can go to Yahoo and download them from there.
posted by Michael 6:46 AM
(Commodity) Fear and Loathing in the Software Industry
The Microsoft 10Q for Q4 2002 confirms a lot of what I said in my response to Charles Mann (see below). It also has some disclosure that should scare the poop out of Microsoft shareholders.
Comments on Charles Mann's article in MIT Technology Review on software quality.
Mann MIT Technology Review Introduction.pdf
Why Is Software So Poor - Response to Charles Mann.pdf
posted by Michael 6:31 AM
War and Taxes. Writing in the 2/21/2003 issue of the WSJ, Steve Liesman reviews James Macdonald's A Free Nation Deep in Debt --- The Financial Roots of Democracy.' MacDonald analyzes 3000 years of the history of government debt and cautions that reducing revenue in the face of war is unprecedented. My letter to Steve commenting on his review and identifying the flaw in MacDonald's analysis will be attached when I'm able to upload it, In the meantime, you can find it on the Yahoo group server.
A recent article in the Wall Street Journal highlighted the debate over the benefits of globalization and particularly the critical views of Joseph Stiglitz, winner of the Nobel Prize in Economics and head of the Council of Economic Advisors in the Clinton Administration.
120202 WSJ_com - Globalization Gets Mixed Grades in U_S_ Universities.pdf
Attached is a copy of my correspondence to Professor Stiglitz.
Debate with Paul Krugman of Princeton University on income and wealth disparity and tax policy.
110602 Krugman Introduction.pdf
110602 Krugman Correspondence.pdf
Comments in response to a post by Brad DeLong on the Bush Administration's economic policy.
Brad's post: 111802 DeLong Post.pdf
My comments: 111802 DeLong.pdf
posted by Michael 6:29 AM
The Lawrence Klein Letter
Nobel economist Lawrence Klein of the University of Pennsylvania was one of a number of liberal economists who signed a letter to George Bush – published in a full page ad in the New York Times – critical of the Administration’s proposal to eliminate the tax inefficiency of dividend payments. Klein spoke at a press conference and I have posted my letter providing comments on his remarks and those of other economists who also spoke (Stiglitz of Columbia University and Modigliani of MIT, both also Nobel Laureates).
Essentially, I make the same points in this letter that I have made before.
· The Administration plan is flawed because it excludes dividends received from taxable income rather than allowing deduction from EBT at the enterprise level, and because it contains unnecessary and economically inefficient incentives for retained earnings.
· Treating dividends (a cost of equity capital) in the same way as interest (the cost of debt capital) will cause many corporations to change their capital structures to maximize dividends to the extent free cash flow allows whenever the firm’s risk-adjusted ROE is lower than that of alternative investments.
· In terms of shareholder return, dividends will become a more important, and share price increase based in increases in GAAP earnings will become less important.
· Valuation will increasingly depend on cash flow multiples and ROE rather than GAAP earnings multiples.
· Financial reporting quality will improve to the extent that management is forced to focus more attention on cash flow and less on GAAP earnings.
· Corporate governance will improve for a variety of reasons.
· While it is not possible to predict the impact on Treasury receipts, there is no basis for the conventional wisdom that the effect will be significantly negative.
· Yadda, yadda, yadda.
I’m beginning to realize that nobody cares about the merits. Whether my arguments are right or not is of interest to no one. The consistent response is that eliminating the tax efficiency of dividends is a proposal that will benefit the rich, and the idea is dismissed out of hand for that reason, and that reason alone.
The problem is that this conventional wisdom is not true. Properly changing the law of dividend taxation will benefit lower and middle-income folks far more than the rich. But, you only realize this if you give up a static, narrow view of the role of dividends in corporate finance so you can see how the change will fundamentally alter corporate capital structures. Shares with high dividend yields with underlying prices based on free cash flow and ROE will be much more attractive investment vehicles to lower and middle income investors. They will be safer, and the return will come in the form of (taxable) cash dividends, which will be OK with these investors because they have low marginal tax rates.
Frankly, except for improvements in the quality of financial reporting and corporate governance, I do not see what the so-called rich get out of this? Dividend income taxable at ordinary income rates rather than share price appreciation taxed at capital gains rates?
For those who aren’t rich, however, eliminating dividend taxation could provide as much benefit as the elimination of minimum investments for purchasing bank CDs a generation ago (when the rich could earn 40% more – with a minimum investment of $100,000, later reduced to $10,000 – than the poor schmuck stuck with regulated rates in his passbook account).
032703 Klein - Dividend Tax.doc
Enron - The Future of Capitalism
My introduction: Enron and the Future of Capitalism200303195424.pdf
Cato Institute Analysis: Economic Analysis of Enron - Cato.pdf
Corporate Dividend Policy
Henry Paulson Article and Response
032003 Paulson - Dividend Tax Article.pdf
032003 Paulson - Dividend Tax - Response.pdf
General Dividend Tax Debate
Those of you who know my know that I have been doing a lot of thinking and analysis on the Administration's proposal to normalize dividend tax policy. There are aspects of the Administration's proposal that I think are wrong as a matter of policy. But, I believe that a change in dividend tax policy could have fundamental and favorable repercussions throughout our capital markets.
A friend of mine asked that I summarize my views on this subject so he can send them to Mitch Daniels at the White House. My letter to him is attached. Since this letter incorporates all of my high level thinking on this subject, I have deleted all the prior posts on this subject. But, not to fear, if you really want to see them and you are a member of my BlogList group at Yahoo, you can download a compressed archive of all of them.
021403 DH Stickney Dividend Tax Policy.pdf
Here is the letter responding to the earnings quality issue raised in the Journal on 02/18/2003.
021903 Weil (WSJ) re Earnings.pdf
posted by Michael 6:25 AM