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Saturday, July 20, 2002

The State of the Second Amendment

Tony Adragna
Rather, I should say "the States [and} the Second Amendment".

Our favourite law professor, Glenn Harlan Reynolds, points to a letter "from eighteen state attorneys general (including six Democrats) in support of the individual-right interpretation of the Second Amendment." Then, he tells us to check out footnote 1.

Of course, I knew what was in the footnote before I even looked at it -- it just had to be a law review article by the man hisself. But, I ask: why couldn't he just give us a link to the article as well?

That's where folks like myself enter the picture: need an article? You have a citation? Here's your reading material.

I previously read the artcile, and consider the addendum most useful in addressing the anti-gun movement's "militia" argument as well as the milita movement's argument on "revolt".

Friday, July 19, 2002

Zack the Whack Job

Will Vehrs
Tony, I looked at the CNN poll and the results were about 10 points under the figures you cited in the Fox Poll, but still pretty overwhelming.

I agree with Judge Brinkema's ruling. She's got one the toughest cases ever and I think she's done well so far. I think she was smart to let Moussaoui act as his own lawyer. It's easier to let his subsequent performance give her justification to change that ruling (which I think she will) than putting up with his outbursts about not being able to act as his own counsel.

Moussaoui might be a whack job, but his outrageous behavior yesterday might have given him something worthwhile--a pretty strong case for a thoroughly contaminated jury pool that couldn't possibly give him a "fair" trial. Of course, he contaminated the jury pool, but never mind that. He's playing a long-range game for an Islamic audience overseas.

The Moussaoui Plea...

Tony Adragna
I suspect, Will, that there's a fair amount of criticism of Judge Brinkema's refusal to accept Moussaoui's gulty plea. If you look at the online poll [n.b.: I'm ever suspicious of all polls, but most especialy online polls] attached to the FOXNews story you'll see that 85% (as of this time) of respondents think that the plea should be accepted.

Why has Judge Brinkema taken the unusual action of not accepting the plea?

Well, really, what Judge Brinkema did was not all that unusual in similar circumstances. In fact, Rule 11 of the Federal Rules of Criminal Procedure requires that "the court" [read: the judge] "determine that the defendant understands, the following:
(1) the nature of the charge to which the plea is offered, the mandatory minimum penalty provided by law, if any, and the maximum possible penalty provided by law, including the effect of any special parole or supervised release term, the fact that the court is required to consider any applicable sentencing guidelines but may depart from those guidelines under some circumstances, and, when applicable, that the court may also order the defendant to make restitution to any victim of the offense; and..."
Moussaoui's own conduct before Judge Brinkema pretty clearly demonstrates that he really doesn't have a clue. Specifically, Moussaoui's own misunderstanding that a guilty plea would allow him to avoid "the maximum possible penalty provided by law" -- the death penalty -- probably was the most significant factor in the judge's decision to advise the defendant that he should think about it a bit more.

I'm not sure what Judge Brinkema is going to do when the defendant next appears before her. I hope that she accepts the plea, but there's perfectly good rationale for her not to do so -- sometimes defendants really do need to be protected from themselves, and some of those defendants turn out to be actually innocent. I think it worse to abandon a good rule simply because it also might help the guilty.

Thursday, July 18, 2002

Markets, economics, and mythology....

Tony Adragna
Listening to Chairman Greenspan the other day evoked something that I wrote on March 21 of last year(you know, after the tech bubble went POP):
In discussing the economy with friends, the stock market always is alluded to as the most important factor. I always disagree. The market can be a gauge, but of what? The ups and downs of the market has been used as a measure of confidence in the economy. I think that this is OK, as long as we don't view the market indices as a true measure of the REAL economy.

Why not? Well, the indices of market activity don't tell the whole story. The strength of the stocks in those indices don't tell the whole story. And, when investors act contrary to economic fundamentals, the market actually tells a false story. What we are seeing in the current stock market is the extreme counterpoint of "irrational exuberance".

Nothing that the Fed, or the administration, does with monetary or fiscal pilicy can now alter the course of events. People simply refuse to accept the cyclic nature of the long term economy. They also refuse to accept the long term strength of the market (average 12% returns over the last 70 years). Now that everybody has so much riding on the market, reactions to the market have been more emotional than analytical. The cure: let the neurosis runs it's course. People will eventually wake up to the realization that the fear is irrational.

Then, we will once again hear that famous phrase: It's the economy, stupid!
Something has happened since then -- we found out that a lot of people were not telling us the truth about the market and some of the biggest companies traded there. Not only has there been a disconnect between the economy and market performance, but there has also been a disconnect between market performance and the performance of corporate America.

Sure, much, or maybe most, of the market's decline is really a correction for "reckless investing, not reckless accounting." The problem is, as Samuelson acknowledges earlier in the same piece, "authorities lavishly praised the 'new economy' and thereby encouraged investors to buy wildly overpriced stocks." Many of those investors were people relying on advice from experts, many of whom -- like Jim Cramer -- have admitted that they misled investors.

And let's not forget that the deception was abetted by bottom line numbers that were at best aggressive accounting, and at worst fraud.

So, to make the point, as Samuelson does, that investors share the blame is itslef misleading -- certainly many investors were "gullible", but gullibility needs exploitation before it becomes a problem. The problem gets even worse the more "democratized" the market becomes:
[...]. I don't think that democratization is a bad thing per se, but I refuse to put any of my money in the market. Why? Well, you might as well ask me to enlist in an army full of people who don't know anything about guns.

What am I saying? I'll be blunt - there are alot of people in the market who shouldn't be there. I think it was Will Rogers who commented on bellboys discussing their portfolios, and I think that his comment would apply today. The problem isn't that there are too many people in the market, it's that there are too many people who DON'T KNOW WHAT THEY'RE DOING in the market.

What's the relevance of my rant? If you want the answer, then you need to put down the "market" section and look at the rest of the economic news. From what I can see, the fundamentals of our economy don't justify the public neurosis that surrounds the ups and downs of the stock market. In fact, the most recent "beige book" (after correcting the error in reporting sale[s] of previously owned homes, which rose 3.8%, not fell 6.6) doesn't justify the ups and downs of the stock market itself.

It's not the market, it's the economy, Stupid!
"Greed" I don't have such a problem with. People always want more than what they have -- it's human nature. Self-restraint doesn't come naturally -- it must be exercised. The way to combat the excesses of human desire isn't through morality & ethics from the metaphysical perspective -- calling on people to be good, then expecting them to regulate themselves. I like the idea, but it just doesn't work: even Chairman Greenspan admits that he was wrong about self-regulation.

I just wish that Chairman Greenspan and Mr. Samuelson would wake up to the fact that they're fundamentally wrong in attempting to assuage the public's concerns through recitation of technicalities. The "fundamentals" don't matter to those households that lost their old age savings in the stock market -- It's way too late to be talking birds & bees after the pooch already got screwed.

[Editors note: Yes, I did cite myself twice above -- the point is that some of us didn't just now discover these issues via the current scandals and decide to make a political ploy. I've been on this topic for years...]

Norton on Vouchers

Tony Adragna
I agree with you on vouchers, Will. I just get that funny feeling in my tummy everytime Congress steps into DC affairs -- there is, after all, supposed to be Home Rule in the District.

Add the tension there to my list of reasons for moving out of the city.

BTW, what do you think of Tony Williams' "petition" fiasco?

Americans Outta Lattitude

Tony Adragna
Isn't AOL one of those "New Economy" companies, Will? I always wondered how they did so well without actually selling anything. OK, so they sell web access and ad space, but the big money maker -- what brought in all of the investment -- was never any tangible product. Rather, it was The Idea of getting in on the ground floor of this "New Economy" thingy.

The only reason you can't call the whole thing a confidence game is because that terminology has a negative connotation.

I wonder what my former clients employed by AOL, the ones who regularly deposited extremely generous checks into their personal accounts, are thinking about their employer at this instant.

As for your own problems with AOL, tell your daughter to get a real ISP![Sorry, couldn't resist -- I loath everything AOL]

I hafta agree with you about pulling the plug on Chairman Pitt right now. But my agreement is based solely on practical considerations -- the Commission needs more members, not less. I can repectfully agree to disagree with Chairman Pitt so long as I'm assured that the Commission is functioning properly and policy is the product of reasoned debate and good faith consideration.

Dismantling a Segregationist

Will Vehrs
Radley Balko compares DC Delegate Eleanor Holmes Norton to George Wallace in this "Straight Talk." In my humble opinion, he makes the comparison work.

This is a powerful argument for vouchers in the DC public schools.

AOL Accounting Irregularities Hit Home

Will Vehrs
Funny I should read that AOL is involved in the latest example of corporate accounting irregularities.

I pay my daughters' AOL subscription every month. The charge, always $23.90, appears on my credit card. Yesterday, my credit card bill arrived and there were four charges for $23.90. Two months ago my bill had two charges for $23.90 and I had to call the card company and get the duplicate charge removed. Now I'll be calling again to get three charges removed. There is no possibility that my daughters have signed up for more than one AOL account.

Routine snafu? Once, maybe. But twice? I wonder. Corporate accounting shenanigans make doubters of us all.

Wednesday, July 17, 2002

Abingdon, Far From Maryland and Wall Street

Will Vehrs
Tony, I've been away on quasi-business trip to beautiful Abingdon, Virginia. It's hard for me to comprehend that I drove over 300 miles southwest from Richmond and was still in Virginia. I actually saw a sign for Knoxville, TN--I wouldn't have been surprised to see a billboard for InstapunditLand ....

There wasn't much talk of Kathleen Kennedy Townsend or Harvey Pitt in Abingdon. Those folks are concerned about jobs. At one time, during the Internet Revolution, small rural communities really thought that companies would locate there because, with a modem, it didn't matter where a company was physically located. All they ended up seeing were telemarketing centers, taking advantage of non-union, low wage conditions. High tech firms stayed in clusters near major metropolitan areas. Southwest Virginia is back to wooing manufacturing, just like they always have.

Townsend's platform has all the excitement of a think tank footnote. Guess she won't be making Maryland a "laboratory of democracy" franchise.

As for Harvey Pitt, the Senate confirmed him unanimously and they need to find malfeasance or failure of due diligence before they call for his head. Right now, he's as good as it gets. If he left, the SEC would be rudderless for a long period and a new Chairman would have to start from scratch. That wouldn't be good government management in this situation.

Tuesday, July 16, 2002

A Political Transposition

Tony Adragna
Does this seem kinda sdrawkcab to you, Will? Here's an outline of KKT's plan to meet short-term budget challenges
Top-to-bottom management and budget review.
I will direct a review of the structure and budget of every state agency to identify cost-saving measures and organizational changes to improve performance and save money. I will draw on the expertise of leaders from the private, public, and non-profit sectors during this review. Economic Growth, Fiscal Responsibility

Tough choices.
Based on this top-to-bottom budget review, we will make tough choices and eliminate any wasteful and duplicative spending. Last year, we took steps to freeze hiring and reduce spending across state agencies, and eliminated 3,500 vacant positions from the budget this spring. Until our economy is fully recovered, we will examine all budget options carefully and continue to make tough decisions where necessary.

Presumptive level funding for FY04.
If revenue performance remains at or below projections, I will prepare an FY2004 budget that anticipates level expenditures for remaining programs and services. Any increase will require a demonstrated urgent public need.

Month to month agency monitoring.
I will direct regular monthly reviews of performance and expenditures for state agencies so we can identify emerging issues early and address them quickly.

Maximize federal resources.
I will require state agencies to ensure they are using all available federal resources and to provide regular updates on new opportunities for doing so.

Slots are not the answer.
We should not gamble with our children’s future by introducing slots or casino gambling as a short-term fix because it only creates long-term problems. Consistently, the introduction of slots and casinos has decimated small businesses, increased gambling addiction, and, most devastatingly, significantly increased crime. Slots and casinos mean more robberies, more thefts, more stolen cars, more assaults, more divorces, more child neglect cases, and more suicides. This is not the right answer for Maryland’s future.
She's talking 'bout cutting/freezing spending. And pay attention to the position on slots.

I turned to Ehrlich's site for the opposing view -- doesn't look good to me. This is what Ehrlich says about Maryland's economic position:
Excessive government spending has led to a $1.5 billion deficit. Maryland's budget must be balanced in an honest and efficient manner, without sacrificing programs for the poor and others in need. Excessive spending on non- essential initiatives must be curtailed and our budget priorities redefined.
That's it! He does define his "budget priorities" -- pretty much everything on the menu as presented.

What's his plan? I dunno -- he doesn't give any kind of clue anywhere on his website about what his plan is gonna look like. The website does link to newspaper articles, and two of those stories cite Ehrlich's revenue raising ideas: an increase in the gasoline "user fee" [ It's a TAX, Bob] to cover his transportation priority, and slot machines to help with education funding.

At least Ehrlich is honest enough to not "rule out new taxes." KKT ought unambiguously do the same -- she's especially gotta not let Ehrlich get in front of her on funding schools...

Update on Accounting for options: I don't know why I've been trying to 'splain the issue -- all I had to do was refer y'all to Andreas [ some book learning in the body of knowledge does help]

Monday, July 15, 2002

The Pitt-falls of Conflicts of Interest

or Haranguing Hirsute Harvey
Tony Adragna
Will, Harvey Pitt is too good a lawyer to be whingeing on about how he's been labled "guilty by association." Any code of ethics which contains a requirement that practitioners recuse themselves in cases where there is a conflict does so, well, you know, precisely because there's a concern that the association might improperly influence matters before them.

I said previously that I consider Chariman Pitt extremely well qualified for the post -- he is The Expert in Securities Law (as well as having been an SEC attorney from 1968 to 1978, eventually becoming General Counsel). Neither do I question his integrity as lawyer nor do I question his ability to settle enforcement matters that come before him in a fair and just manner with attention to the spirit and letter of the law.

Where I have serious concerns with the posting of Chairman Pitt at the SEC is on policy questions vis a vis the regulation of some of his former clients. I don't fault him for aggressively litigating within the bounds of law on behalf of his clients -- that was Mr. Pitt's ethical obligation then, whether or not he shared the particular views of his clients.

But, Mr. Pitt was more than simply a litigator for the accounting industry, he was, and still is, an advocate of that industry's views in more than the legal sense.[ Evidence the fact that he met with the Big Five -- soon to be Four (I remember when it was Eight) -- prior to drafting his initial regulatory plan]

The conflict of interest that worries me is about an opponent of regulation being at the helm of a regulatory agency.

To his credit, he has moved away from self-regulation, but only toward what he calls "private sector" regulation -- a regulatory authority truly independent of the accounting industry, but not a government body -- which I don't think goes far enough.

And, I still haven't heard him change his tune on the idea that a kinder and gentler SEC enforcement policy would provide incentive for companies to bring their accounting problems forward sooner -- that may be true where there was no intentional fraud, but it seems that the lax review (Did you know that the SEC doesn't even review every 10K and 10Q that gets filed? - they don't have the staff) and enforcement we've experienced due to cuts in both SEC staff and authority have actualy contributed to problems.

I'm not sure that the comparison with Chairman Leavitt's recusal record is on point: Leavitt worked Wall Street til '78, then was an officer (Chairman?) of the AMEX, and owned Roll Call; in between Pitt's stints at the SEC he spent 25 years in private practice and a lot of that time was representing clients before the agency he now heads.

An automatic disqualification? Not necessarily, but I would have judged Mr. Pitt unsuitable for the position considering his not so distant advocacy against many of the reforms that the industry clearly needs.

Addendum: I read the news about Coca Cola today, and I'm still not happy. Expensing options as they vest is the correct approach, and the basis should be the full value at time of exercise. Instead, they will use the value at the time that the option is granted [that is the only accepted method under the current standard, unless you don't account for options at all]. Why is that a problem?

Here's an example:
In 1999 I was granted some options to buy Citigroup shares at something like $32, but the shares were trading at something like $65 dollars at the time. Right now, Citigroup is trading at $36.94. But, I'm OK -- my options haven't vested yet, and even when they do I'll have a certain amount of time to hold for a higher value before my right expires.

But, what if the value drops below $32 and stays there til after my option expires? Well, I would be stupid to exercise the options -- pay more for the shares than what they're worth. In that case, the company was forced to expense some compensation that I never realized.

How 'bout if the shares climb to $100 before my options vest -- I still have two more years to wait bfore those options are vested, and anything can happen, right? Well, in that case, the expense is still understated by $35 -- multiply that by the few options that I have and 'tis no biggie. But, multiply that understatement by the hundreds of thousand of shares that a senior executive might be exercising, and that understatement makes a BIG difference on the bottom line.
See how just expensing options isn't the panacea it's claimed to be? Rather, it's how you expense the options that matters. If you don't expense them when they're exercised, using the share value at that date, then you still aren't getting a true picture.

The best you can do with options that haven't been exercised is book them as a deferred liability, making periodic adjustments to that ledger to reflect the current value of that liability.

But, to simply treat them the same way that you treat other forms of compensation doesn't work -- there's no compensation realized to the employee, and no actual expense to the employer, until and unless the options are exercised.

Senator Levin's proposal for a study to thrash out a good rule on accounting for options should have been adopted. Instead, the accounting industry and corporations are going to be forced into using a rule that dosen't really make good sense, and really doesn't make the financial reporting any more transparent.

But, at least the Senate did pass the Sarbanes bill -- now it's off to conference...

Sunday, July 14, 2002

Sink or Swim Pitt

Will Vehrs
Sometimes it's easier to write Punditwatch (just posted) when the pundits have lots of different issues to discuss. Today, it was all corporate scandal, as SEC Chairman Harvey Pitt was sent out on Meet the Press and Face the Nation to defend himself, with the Administration undoubtably waiting on the reviews before assembling a guillotine.

Check out my summary for cruel and unusual, Mark does Martha, and the dangers of unanimity.