Coyote Blog

Remind me to not cry any tears next time GM complains about government regulation:

In an audacious move Sunday, General
Motors demanded that the federal government step in and create a
national ethanol fuel station infrastructure at the same time the
company announced that it has invested in Coskata, a cellulosic ethanol
startup company.

 

Coming on
the heels of federal legislation that set national mandates for ethanol
production, GM's strategy amounts to federal guarantees for its
investment in the ethanol industry.

 

"We
need to grow E85 (ethanol) stations," said GM CEO Rick Wagoner at a
Detroit Auto Show news conference. "It is time for the U.S. government
to do it through regulation."

The article goes on to document the strong rent-seeking history of Coskata.

One small bit of good news is that the media seems to finally be catching on to the ethanol subsidy farce.

It's great that our politicians have discovered the need for new energy
technologies. But it appears that Washington is determined to put its
money"”our money"”on the wrong horse. Right now, researchers are studying
a host of energy solutions, including hydrogen, high-mileage diesel,
plug-in hybrids, radical reductions in vehicle weight and cellulosic
ethanol (made from cornstalks, switchgrass or other nonfood crops). It
is far too soon to say which of these holds the most promise. But,
instead of promoting experimentation and competition to find the best
solutions, politicians seem ready to declare ethanol the winner. As a
result, our nation could wind up with the worst of both worlds: an
"alternative" energy that is enormously expensive yet barely saves a
gallon of oil.

Les Miles will remain as coach of the LSU football team (at least for a while) despite being wooed by Michigan.  (LSU must wonder what's wrong with their coaching job - they have won two national championships this decade but can't get a coach to stay).

In order to keep Les Miles, LSU inserted this clause in his contract:

Should Miles win the BCS championship [ed:  which he now has accomplished] his contract states he has to be
among the top three paid college coaches in the nation, which would
bump him to the $3.5 million range.

This is not uncommon language now in sports contracts.  For example, players with a franchise tag in the NFL must get a salary equal to or greater than the average of the top five players at that position.

So here is my question.  What happens if three other college coaches, say Pete Carrol, Jim Tressel, and Urban Meyer (who have all won national championships in the last 10 years) were to demand that they too should be guaranteed a salary that puts them in the top three coaches?  Don't things start getting real recursive at this point?

Postscript: Yeah, I know, the language generally says they get bumped to a top X position on the day of a certain event, like winning the BCS or having the franchise tag applied, which circumvents the circularity problem, mostly, by not being an open-ended reset.   It is still funny to think about.   There is nothing to stop 4 coaches from negotiating a clause with an open-ended reset such that their salaries would spiral to infinity.  Even Solomon might struggle with that one when it went to court, though the Gordian Knot solution would be to just run one of the four through with a sword.

I wonder if this has ever happened, say with two CEO's that had contracts that guaranteed that each would, at any given time, be the highest paid CEO in the Fortune 500.

A couple of posts ago, I wondered how Radio Shack still survives when CompUSA is now dead.  Thanks to a reader, I find that the Onion has already plowed this ground:

Despite having been on the job for nine months, RadioShack CEO Julian
Day said Monday that he still has "no idea" how the home electronics
store manages to stay open.

"There must be some sort of business model that enables this company
to make money, but I'll be damned if I know what it is," Day said. "You
wouldn't think that people still buy enough strobe lights and extension
cords to support an entire nationwide chain, but I guess they must, or
I wouldn't have this desk to sit behind all day."

The retail outlet boasts more than 6,000 locations in the United
States, and is known best for its wall-sized displays of
obscure-looking analog electronics components and its notoriously
desperate, high-pressure sales staff. Nevertheless, it ranks as a
Fortune 500 company, with gross revenues of over $4.5 billion and
fiscal quarter earnings averaging tens of millions of dollars.

"Have you even been inside of a RadioShack recently?" Day asked.
"Just walking into the place makes you feel vaguely depressed and
alienated. Maybe our customers are at the mall anyway and don't feel
like driving to Best Buy? I suppose that's possible, but still, it's
just...weird."

I give up.  But the whole Onion article is very funny and worth reading.

I propose a survey.  We will ask 500 CEO's of large company's and 500 small business owners just one question

1.  Do you agree/disagree with the following statement:  In order to make my business more competitive in international markets, the federal government needs to raise taxes and expand its scope

How many out of the 1000 would answer "Agree?"  Well, at least the number won't be zero, as long as you ask the NY Times:

"¦the taxes collected last year by federal, state and local governments in the
United States amounted to 28.2 percent of gross domestic product. That
rate was one of the lowest among wealthy countries - about five
percentage points of GDP lower than Canada's, and more than eight
points lower than New Zealand's. "¦the meager tax take leaves the United
States ill prepared to compete. From universal health insurance to
decent unemployment insurance, other rich nations provide their
citizens benefits that the U.S. government simply cannot afford.
"¦revenue will prove too low to face the challenges ahead.

I love the part about unemployment insurance particularly -- other countries are more competitive than we are because they pay their citizens more not to work.  Huh?  Daniel Mitchel responds:

The editorial conveniently forgets to explain, though, how America is
less competitive because of supposedly inadequate taxation. Is it that
our per capita GDP is lower than our higher-taxed neighbors in Europe?
No, America's per capita GDP is considerably higher. Is it that our disposable income is lower? It turns out that Americans enjoy a huge advantage in this measure. Is our economy not keeping pace? Interesting thought, but America's been out-performing Europe for a long time. Could higher rates of unemployment be a sign of American weakness? Nice theory, but the data show better job numbers in the United States.

I also would point out the general direction of net immigration, which has always been towards the US from nearly every country in the world rather than the other direction.

The favorite argument du jour for more taxes is that the US has more income inequality than other countries.  Well, that is sort of true.  Our rich are richer than theirs.  But are our poor poorer?  In fact, as I posted here, the data (from a liberal think tank) shows that they are not.   The poor in European countries have a higher percentage of a lower median wage.  When you normalize European income distribution numbers to percentages of the US median wage, you can see our poor do at least as well as those in Europe, while our middle class and rich do better.

The US poor still trail countries like Switzerland, but that is because of very different immigration realities.  The US numbers for the bottom quartile are weighed down by tens of millions of recent immigrants (both legal and not) whereas those of Switzerland and Norway are not.  If you left out recent immigrants, my guess is that the US poor would be the richest in the world.

Apparently, the garbage nazis have won the contract in Seattle.  To remind you, here were some of their proposals in their bid for the contract:

If [CEO Chris] Martin is allowed to implement what he calls "my best
idea, my get-people-riled-up thing," we could all soon be subject to a
kind of garbage audit, too. He wants to bring the equivalent of the
red-light camera to your front curb. Just as the traffic camera
captures you running through a stoplight, CleanScapes' incriminating
photos would catch you improperly disposing of a milk carton. (It
belongs in the recycling bin.)

He also has advocated mandatory waster audits, whatever those are.  This is the choice that libertarians face every day -- we can either vote for a party that wants to listen to our phone calls or the party that wants to search our garbage.  Put a pizza carton in the recycling, you spend a night in the box.  Put a milk carton in the trash, you spend a night in the box.

It's never too early to start google bombing the company's home page:  Garbage Nazis

TJIC quotes Scott Rafer:

Rafer's Rule #1: "˜Un-sexy' is good business. This is a riff on a market
principle Rafer picked up from a couple of his ancestors back east: one
who ran Rafer's Kosher Meats; and his grandfather, who ran Rafer's Army
Navy Surplus (both were in business in the 1950s, long before Rafer was
born.) The idea here is that there is potential in furnishing a
(seemingly) boring business that plenty of people need, but which few
people want to do - a.k.a. stuff that ain't sexy. Which also means
you're likely to have a reliable market for your business, and might
not have so much competition - good!

I absolutely agree.  I have been in sexy and I have been in boring, and from a long-term profit perspective, boring is better.  Here is the way I put it to friends:  "Avoid any business where there are substantial non-monetary reasons why people might want to start a business there."  For example, the bankruptcy roles are littered with brew-pubs.  Guys have a male fantasy of owning their own bar and brewery, and, shazam, there are way too many of them.  Many parts of aerospace are the same way, filled with guys who love aviation more than making money.

From reading the press, it would seem that what the world is short of is "bold new visions."  But in fact bold new visions are a dime a dozen.  I had to try to sell a number of them when I was in the Internet world.  I would argue that what is in fact in desperately short supply is managers and companies who can focus, day after day, ruthlessly on operational excellence.  I worked for years for a company called Emerson Electric in St. Louis, a conglomerate that owned the world's greatest collection of boring businesses.  In their prime, under CEO Chuck Knight, they were unbelievable at blocking and tackling in boring businesses.

This point about boring and sexy is so important that when I was at Harvard Business School, the first two classes in the first year competition and strategy course hammered these points home.  Class one was the story of Rockwell Water Meters.  Class two was the story of some go-go semiconductor business (maybe Fairchild?)  These two cases epitomized "cool" and "uncool", but in the end it turned out the semiconductor firm never made a return on capital, while the water meter business had stratospheric returns.

The common response I get to this is, "but what about all of those Internet millionaires?"  With a few exceptions (Amazon, eBay), most of the folks who made millions in the Internet did not make them from operating profits.  They made them with timing, selling out inflated stock to the public or to a bigger sucker (e.g. Yahoo) before the whole Ponzi scheme crashed.  Does anyone really think that Maria Cantwell created real value in the marketplace?

I am way, way late in posting this, but there was good news several weeks ago when a judged slapped down federal prosecutors in the KPMG case for essentially following the Thompson Memo and dismissed all charges in the case.  Here was the initial confrontation the judge had with prosecutors over a year ago, which explains key provisions of the Thompson memo:

Those steps were extraordinary in their attempt to
pressure corporate executives: They include waiving attorney-client
privilege to give investigators access to internal documents and
cutting off accused employees from legal and other forms of support. In
short, the Thompson memo said that companies under investigation are
expected to surrender any right against self-incrimination and cut
their accused employees adrift.

In one sense, the memo's guidelines are just that --
internal guidelines for prosecutors. But as a practical matter, only a
rare CEO will risk the death sentence that a corporate indictment
represents. So "cooperation" as defined by Justice is hardly optional.
It was on this point that Judge Kaplan took Assistant U.S. Attorney
Justin Weddle to task last week. When Judge Kaplan questioned the
fairness of pressuring companies to throw their employees overboard,
Mr. Weddle replied that companies are "free to say, 'We're not going to
cooperate.'"

"That's lame," the judge retorted. He then asked Mr.
Weddle "what legitimate purpose" was served by insisting that companies
cut their former employees off from legal support. Companies under
investigation, Judge Kaplan noted, ought to be free to decide whether
to support their employees or former employees without Justice's "thumb
on the scale."

Mr. Weddle replied that paying the legal fees of
former employees charged with crimes amounted to protecting
"wrongdoers." This prompted the judge to remind the young prosecutor
that the accused are still innocent until proven guilty. He also
reminded Mr. Weddle that the Constitution's Sixth Amendment guarantees
the right to counsel. And for good measure, if the government is
confident in its case, it shouldn't be afraid to allow "wrongdoers"
access to an adequate defense.

And this is from his decision to drop all charges:

Just as prosecutors used KPMG to coerce interviews with KPMG personnel
that the government could not coerce directly, they used KPMG to strip
any of its employees who were indicted of means of defending themselves
that KPMG otherwise would have provided to them. Their actions were not
justified by any legitimate governmental interest. Their deliberate
interference with the defendants' rights was outrageous and shocking in
the constitutional sense
because it was fundamentally at odds with two of our most basic
constitutional values "“ the right to counsel and the right to fair
criminal proceedings. But the Court does not rest on this finding
alone. It would reach the same conclusion even if the conduct reflected
only deliberate indifference to the defendants' constitutional rights
as opposed to an unjustified intention to injure them.

Tom Kirkendall has more analysis

Tom Kirkendall has an update on the various Enron cases, starting with the Nigerian barge case where  the conviction of four Merrill Lynch executives was vacated by the Fifth Circuit.  In fact, the appeals court ruling was so damning that the DOJ has decided not to retry the executives, and the case may well be a leading indicator that other Enron-related prosecutions are in jeopardy.

Although expected, the DOJ's decision in the Nigerian Barge case
reverberates through several other pending Enron-related cases. The DOJ
can retry three of the four former Merrill Lynch executives, but that
would be petty by even the DOJ's standards given the eviscerated nature
of the original charges and the fact that each of the defendants has
already spent a year of their lives in prison based on a prosecution
that was based more on resentment than on true criminal conduct. The
Fifth Circuit's now final decision in the barge case casts doubt (see also here) on a substantial number of the charges upon which former Enron CEO Jeff Skilling was convicted, and dispositively blows away over 80% of the case against former Enron Broadband executive Kevin Howard. In addition, the re-trials of Howard's former co-defendants from the disaster that was the first Enron Broadband case are now in various states of disarray, as is the pressured plea deal of former mid-level Enron executive, Chris Calger. And don't forget the mess that is the DOJ's case against the NatWest Three (see also here).

Apparently, the Democratic Congress is trying to "take on" high executive pay with some kind of punitive taxation plan.  This fits well into a class of legislation I would describe as "useless at best, probably counter-productive, but of high symbolic value to our base," something to which both parties are unbelievably susceptible.

I'm confused, by the way, about why exactly I should care how much CEOs are paid, particularly for executives that don't work for companies in which I own stock?  I don't think Paris Hilton, George Clooney, or the CEO of Home Depot are worth what they are paid, but I don't know how it affects me except perhaps for some simmering envy.  Does anyone with above a 5th grade education really believe that they will pay one cent less for gas or a refinery worker will make one dollar more if the CEO of Shell is paid less?

I do understand why the shareholders of Home Depot might be pissed off about what they were paying their CEO, or more accurately, what they paid him to go away.  I am sure the Arizona Cardinals felt the same way about Dennis Green.  Now, if Democrats wanted to suggest that shareholder voting and corporate governance rules needed to be amended to make it easier for shareholders to hold managers accountable for bad decisions and to overrule sweetheart deals between buddies on the board, I am very open to listening.

For the lack of a better term, I will call large, old-line union dominated companies "Big Rust Belt."  These are companies that tend to have strong unions and that have compensation packages most new companies eschew (e.g. defined benefit rather than defined contribution pensions).  These companies tend to be experienced rent-seekers, and usually are beneficiaries of protectionist practices.  I generally lump the big 3 auto makers (and much of their supply chain) and integrated steel manufacturers in this description.  Other industries, like traditional airlines (e.g. United but not Southwest) also fit in this description.

Already over the past several years, Big Rust Belt has been getting bailouts of their defined-benefit pension plans.  Going forward, Big Rust Belt is looking for the government to bail them out of their health care obligations as well.  Big Rust Belt began offering health benefits as part of their compensation packages in WWII, when government wage freezes made it difficult to compete for labor, and offering health benefits was a way to evade the wage laws.  Health benefits grew in popularity at a time when it seemed reasonable that your employer might still be alive and employing you forty years from now, and because Congress and the IRS made these plans tax-preferred over cash compensation.  Short-sited corporate executives began offering retirement health care in labor negotiations as a way to reduce cash wage increases, on the theory that cash wages hurt the bottom line now while retiree benefits hit the bottom line, well, on someone else's watch.

Now these health benefits are an albatross around these corporations' collective necks.  Not only are they bankrupting them, but smaller companies who were not so dumb as to make these promises to their employees are out-competing them. 

So Big Rust Belt wants at least three things:

• It wants the government to force its smaller competitors to have to offer the same health insurance it was dumb enough to promise.
• It wants the government to take on a portion of its medical obligations, particularly for retirees
• It wants to government to by law limit the procedures it has to pay for (i.e. ration care), something they have been unable to do in their union negotiations.

And, surprise surprise, given that Big Rust Belt is even better at rent-seeking than it is in running its core businesses, state and federal governments look ready to deliver on all of these.  Each of these is a feature of the governator's new plan, and all are features of various Hillarycare models discussed by Democrats in Congress.  So no one should be surprised when GM CEO Robert Lutz says:

he expects the new Democratic-controlled Congress will be more understanding on health care issues

"More understanding" means "more ready to bail Lutz and GM out of there business problems."  And remember that for Big Rust Belt, universal health care does not mean "great, now everyone can have health care";  it means "great, now we don't have to bother competing with any companies who are smarter about how they have compensated their employees."

Update:  More Big Rust Belt rent-seeking here.

This is a cool site for flight tracking.  It is better than other sites I have tried because it also allows tracking of private tail numbers (follow your CEO's jet! -- not really, most private owners block their tail number from tracking) and it has a cool real-time view around airports.  Here is O'Hare.  Hat Tip:  Tom Kirkendall

As a way to celebrate the holidays and perhaps compensate for a more relaxed pace of blogging for a while, I am beginning a serialization of my new novel BMOC.  If there is interest, I will keep it going for a while.  So, lets get started.  Enjoy!  (You didn't really feel like doing any real work today, did you?).   By the way, for you prospective business school students, though it may seem un-serious, embodies my best advice for you.  Chapters 3 and 4 continue here.

chapter one

Robert
Gladstone, multi-millionaire CEO of the M Group, looked around the
room at his fellow conspirators and longed for the piranha
button. 

Continue reading ‘BMOC, Chapters 1 and 2’ »

The word "censorship" is used all-too-often in this country.  I take a much more narrow definition of censorship.  In my mind, only the government can be guilty of true censorship, which I define as using the coercive power of government to prevent certain forms of speech.  By even this narrow definition, the recent threats against Exxon by Senators Jay Rockefeller and Olympia Snowe come awfully close to censorship:

We reprint the full text of the letter here,
so readers can see for themselves. But its essential point is that the
two Senators believe global warming is a fact, and therefore all debate
about the issue must stop and ExxonMobil should "end its dangerous
support of the [global warming] 'deniers.' " Not only that, the company
"should repudiate its climate change denial campaign and make public
its funding history." And in extra penance for being "one of the
world's largest carbon emitters," Exxon should spend that money on
"global remediation efforts."

The
Senators aren't dumb enough to risk an ethics inquiry by threatening
specific consequences if Mr. Tillerson declines this offer he can't
refuse. But in case the CEO doesn't understand his company's jeopardy,
they add that "ExxonMobil and its partners in denial have manufactured
controversy, sown doubt, and impeded progress with strategies all-too
reminiscent of those used by the tobacco industry for so many years." (Our emphasis.) The Senators also graciously copied the Exxon board on their missive.

This
is amazing stuff. On the one hand, the Senators say that everyone
agrees on the facts and consequences of climate change. But at the same
time they are so afraid of debate that they want Exxon to stop
financing a doughty band of dissenters who can barely get their name in
the paper. We respect the folks at the Competitive Enterprise
Institute, but we didn't know until reading the Rockefeller-Snowe
letter that they ran U.S. climate policy and led the mainstream media
around by the nose, too.

While I tend to believe that the warming camp is correct that manmade CO2 is creating or will create some global warming, there are a lot of very very good reasons to be skeptical of the magnitude of their warming estimates and their hysterical calls for massive government intervention in the world economy.  I call this the skeptical middle ground on climate.  (Update: more reasons to be skeptical of current "consensus" models here).  A skeptics guide to An Inconvenient Truth is here.

Hit and Run, trying to make a different point, quoted this statement from Harold Meyerson (my emphasis added):

But the new growth of selective libertarianism in the Democratic ranks
is hardly going to be the main source of controversy in coming party
debates. More likely, that debate will pit those who think retraining
is the answer to our more layoff-prone society (that's the Bob Rubin
solution) against those who think that retraining needs to be
supplemented by, for instance, publicly funded alternative energy
programs that would generate millions of jobs (that's the solution of a
number of union leaders, and one that I favor as well). The latter
position is clearly more in the New Deal liberal mode, but Rubin's is
hardly libertarian.

Do serious people actually favor publicly funded alternative energy programs of the scale that would employ millions of people?  Note that since the total civilian labor force is approximately 150 million people, he is talking about a program encompassing several percent of the US workforce.  I am supposed to be on vacation this week, but here are a couple of random thoughts:

• A huge government make-work program seems to be an odd response to an increase in employment volatility, which is how the problem is framed, even by Meyerson.  He calls it our "layoff-prone society."  I don't accept that this is necessarily a bad thing, but even if it is, a jobs program does not solve it.  Our unemployment today is at a low level (less than 5%) so that the problem, if it exists at all, has to be volatility, not the absolute size of employment.  So a jobs program helps, how?
• I will confess a big government-funded jobs program would reduce employment risk in one way:  once someone is hired by the government, whether it be a teacher or bureaucrat,  it is impossible short of a felony conviction to fire them, no matter how horribly destructively incompetent they are.  So anyone hired by this new job program would have a job for life, I guess, though at an enormous dead-weight-loss of the overall economy.
• The current economy hovers near full employment.  That means that millions of people sucked by the government into an alternative energy program would be pulled out of areas the market currently says is the most productive place for them.  Unless the government has identified a massive market inefficiency, such a program will net reduce the productivity and output of the economy.  Remember -- these millions of people are likely employed somewhere else today, so those places they are employed either have to scale back or pay more for labor.
• Does anyone really think the government is going to make the right technology and investment choices in such a program?  It will take about 47 seconds before the investment process is politicized and spending is handed out as pork to valued supporters in key Congressional districts. (just look at ethanol and the Midwest Archer Daniels Midland lobby). Remember, the government has been pouring all its investment and subsidies and regulations (e.g. zero emissions requirements) into plug-in electric cars, which still are not there technologically.  In the mean time, the market has latched onto hybrids, a technology actually opposed at first by government energy czars in places like California (because they were not zero emissions).  Hybrids have done more to reduce automotive fuel consumption than any of the technologies, from plug-ins to fuel cells, that the US government has supported in any big way.

Postscript:  Yes, I know plug-in hybrids may be here soon, but batteries are apparently still not where they should be.  I would love to have a plug-in hybrid.  Note, of course, a plug-in hybrid is very very different from a straight electric car, which was the choice of the bureaucrats.  Also, I know that some areas have started to subsidize hybrids, for example by allowing their use by one passenger in the car-pool lane.  These are late-to-the-party efforts to claim some government credit for a private market trend already in progress.

Update:  In fact, today's SJ($) brings us a relevent example:

[Former Airbus CEO] Mr. Streiff talked of moving production jobs between
partner countries, running Airbus like a business. For the first time,
there was talk of apportioning work on the basis of competitiveness,
not national entitlement. There were hints that Airbus should emulate
Boeing with major risk-sharing partnerships, looking beyond Europe for
new product development resources and production sites. He even
committed the ultimate sin"”publicly admitting that Airbus had fallen
over a decade behind Boeing in new product development.

In his exit statement, Mr. Streiff said, "I
progressively came to the conviction that the mode of corporate
governance at Airbus didn't allow for the success of my plan." In other
words, the now former CEO implies, he was blocked by people who like
the status quo. So who would be happy with the status quo when the
situation is degenerating with each day? Well, any government official
who wants governments to stay in charge of the economy. The last thing
they want to see is private sector cash reinventing the fruit of their
state-directed industrial policy.

For the best clue to this dysfunction, consider
France's finance minister, Thierry Breton. He recently told reporters
that Airbus is a "European success," but vowed to "defend this model."
Now why would a model need defending if it were successful?

Airbus was created when European governments
orchestrated their economies, creating new national and continental
champions according to politicians' whims. As far as industrial policy
goes, Airbus was a no-brainer: The jetliner industry offers guaranteed
growth rates and extremely high barriers to entry. Take some legacy
industrial assets, insert government cash, find some talented sales
people, and watch it go. Every other European industrial
scheme"”shipbuilding, cars, Concorde"”obliterated value. Airbus was the
only state-supported success. Unfortunately, Europe's politicians
forgot a crucial fact: Airbus succeeded despite government industrial
policy, not because of it. In fact, this government interference has
created some serious trouble.

Look at the Airbus record: a series of moderate
successes (A300/310, 330), one huge home run (A319/320/321), and some
lamentable but forgivable near misses (A340, A340-500/600). But with
the full support and connivance of parent governments, they launched a
spine-breaking disaster, the superjumbo. Without the A380, Airbus would
still be a tremendous success. Instead, they've got a serious
industrial crisis, right in the middle of the best jetliner market in
years. Mr. Breton's "model" of state-guided industries is alchemy in
reverse: spinning gold into straw.

Today, Microsoft came under fire from a number of activists:

Activists today accused Microsoft of spending all of its time focusing on software.  "All they want to do is write code for operating systems and applications".  Activists were complaining that Microsoft does not invest any of its huge profits into alternatives to software and operating systems.  "They have not invested one dime in trying to come up with computing technologies that don't require operating systems or business applications."  Activists also accused Microsoft of not investing in any alternative computational approaches, such as abacus research or mechanical calculators.

Makes no sense, right?  Well, that's because I made it up.  But I did not make this up, which is essentially the exact same charge, just against a different target:

Unlike
other major oil companies that essentially acknowledge the very real
threat of global warming and the need to transition to renewable energy
and off of a finite, non-renewable resource such as oil, ExxonMobil is
using its profits and its power to continue to keep this country
addicted to oil, as President Bush has noted," Hoover said.

ExxonMobil cares only about drilling for more oil, Hoover alleged

You hear this stuff all the time.  But why are the major oil companies responsible for investing to obsolete their own business?  Why are they obligated to invest in things like wind farms or whatever that they know nothing about?   Did we demand that railroads invest in aircraft research?  Do we require cable companies to invest in DirectTV?  For all of its size, ExxonMobil represents a tiny fraction of World GDP -- if all these alternative energy ideas are such great opportunities, let the other 99.99% of the world economy take it on.  Besides, do these guys who think that XOM is evil incarnate really want them controlling the next generation of energy production?

By the way, I thought this was hilarious:

"We
believe that ExxonMobil -- primarily through its former president and
CEO, Lee Raymond -- has been involved in conceiving of and then
promoting the invasion and occupation of Iraq," Reed said. "When the
Iraq war was being cooked up, we think ExxonMobil was in the kitchen."

I love the "we believe" part.  I am sure that half these folks also "believe" that aliens are alive and well in Area 51 and that George Bush was behind the 9/11 attacks.  Would it be too much to ask to bring some facts to the table?  Or how about even a motive?  I could maybe come up with a motive if the US invaded Nigeria, since Exxon has assets at risk there that are threatened by rebels and general chaos, but Iraq?  Since Iraq's output was limited before the invasion, invading Iraq only served to put more oil on world markets, which would depress rather than raise prices and profits.  In fact, if there was really an evil genius oil company pulling the strings of government to maximize their own profits, UN-sanctioned Iraq would be just about the last oil producing country in the world you would want your government puppets to invade.

Today XOM has its annual shareholder meeting, and if you ever want to see a great parade of barking moonbats, buy yourself a share of XOM and attend.  Lee Raymond caught a lot of grief for his compensation package, and it did seem overly generous to me, but I am not an XOM shareholder right now so its not my concern.  I will say that having seen one of the XOM shareholder meetings and the ridiculous grief the CEO must endure for a day, my guess is that the XOM CEO would likely knock several million dollars off his comp. package if he could call in sick today.

The feeding frenzy that the media has been salivating over for days can begin, now that Exxon-Mobil (XOM) as announced quarterly profits.  They reported net income of $8.4 billion on $88.98 billion in sales, for a net income margin of 9.4%.  Previously I observed that 9.4% for a peak profit in a cyclical industry is pretty average, and that over the last decade oil company profits have been below average for the whole of US industry.

In fact, most investors found these profits to be disappointing.  You know you have a fun CEO job when half the country is pounding on you for profits being too high and the other half are pounding on you for profits being too low.  The fact is that XOM and other large US oil companies don't get the benefit of rising oil prices that they did, say, 40 years ago.  US oil companies no longer own most of their overseas reserves since many of their foreign operations were nationalized by countries in the 1960s  (with the US government refusing to lift a finger to protect these US assets, one of the early instances of the no-blood-for-Exxon argument).  Today, XOM must pay near market rate for much of this crude, either in arms-length purchases or through royalty agreements stacked in the favor of local governments.

So what can you folks who are screaming about high gas prices and obscene oil company profits do?  Well, you could tax all these "windfall" profits away, like Ford and Carter did in the late 1970s.  Of course, you would still be paying $3 for gas, but the profits would go to the US Congress to spend, who I am sure will do an excellent job.  Probably could pay for another bridge in Alaska.  Or, you could somehow ban oil companies from making a profit, and drop gas prices by that 9.4%, or about 28 cents.  This would get you $2.72 gas instead of $3.00 gas.  Feel better?  Of course, in either scenario, oil companies would stop making any investments in refining or oil exploration.  Supplies would quickly begin to fall (I won't go into it now, but take my word for it that refineries and oil wells require constant reinvestment just to keep running at current capacity) and I would bet it would take less than a year for that 28 cents to be right back in gas prices due to shrinking supply.

OK, what else could we do?  Well, we could cap gas prices.  Which is a fabulous idea, as long as no one who drives a car has anything better to do than sit in lines all day.  Or, we could regulate oil like we do telephones and electric utilities.  Highly regulated electric utilities make a net income margin of 7.1%.  If we regulated oil companies down to 7.1%, then this would reduce gas prices from $3.00 to $2.93.  So a huge and inflexible and costly national regulatory structure would save about 7 cents a gallon.  Oh, and since for most of 10 years oil company profits have been less than 7.1%, then, a utility type regulatory environment would likely raise gas prices and profits in most years. And of course you would get all the business flexibility, creativity, and customer service currently demonstrated by your local electric and phone company.

So what government action should a irate gasoline customer demand?  Well, I know this answer goes against years of education that the role of government is to step in and take over when any little aspect of life is not quite what citizens want it to be, but the correct answer is "none".  Its like the line from Wargames:  "A strange game. The only winning move is not to play."

More on why gas prices are still well below their historic peaks here.

I have written several times on prosecutorial abuse, most recently in this post on the Justice Department's current practice of forcing companies to waive attorney-client privilege and punishing companies that help their employees seek legal council.

The WSJ($) editorializes about a recent division by Judge Lewis Kaplan in the KPMG trial.

Those steps were extraordinary in their attempt to
pressure corporate executives: They include waiving attorney-client
privilege to give investigators access to internal documents and
cutting off accused employees from legal and other forms of support. In
short, the Thompson memo said that companies under investigation are
expected to surrender any right against self-incrimination and cut
their accused employees adrift.

In one sense, the memo's guidelines are just that --
internal guidelines for prosecutors. But as a practical matter, only a
rare CEO will risk the death sentence that a corporate indictment
represents. So "cooperation" as defined by Justice is hardly optional.
It was on this point that Judge Kaplan took Assistant U.S. Attorney
Justin Weddle to task last week. When Judge Kaplan questioned the
fairness of pressuring companies to throw their employees overboard,
Mr. Weddle replied that companies are "free to say, 'We're not going to
cooperate.'"

"That's lame," the judge retorted. He then asked Mr.
Weddle "what legitimate purpose" was served by insisting that companies
cut their former employees off from legal support. Companies under
investigation, Judge Kaplan noted, ought to be free to decide whether
to support their employees or former employees without Justice's "thumb
on the scale."

Mr. Weddle replied that paying the legal fees of
former employees charged with crimes amounted to protecting
"wrongdoers." This prompted the judge to remind the young prosecutor
that the accused are still innocent until proven guilty. He also
reminded Mr. Weddle that the Constitution's Sixth Amendment guarantees
the right to counsel. And for good measure, if the government is
confident in its case, it shouldn't be afraid to allow "wrongdoers"
access to an adequate defense.

Its good to see these practices starting to get some judicial scrutiny.  There is unfortunately no real political constituency in this country to get worked up about this kind of stuff.  Left-leaning groups tend to be the first to challenge police and prosecutorial abuses of power, but have little interest in doing so when the target (ie corporations) is someone they have no ideological sympathy for.  And right-leaning groups tend to be strong law-and-order types that feel the need to go out of their way to be tough on recent corporate transgressors to avoid the accusation that they are in bed politically with white collar criminals.

Its clearly time for patent reform as it applied to software.  In the last ten years, software engineers have apparently have been able to convince hardware-centric patent examiners that some pretty basic software concepts are "non-obvious" and patentable.  Guestblogging at Overlawyered last week, I mentioned one such patent, the Amazon "1-click ordering" patent, which to me is clearly copyrightable, but not patentable.

Rob Pegoraro makes a similar point in the Washington Post, editorializing on the Blackberry suit:

No, the problem here is simpler. There are too many bogus patents getting handed out.

One
solution would be to make more things unpatentable. Just as you can't
-- or shouldn't -- be able to patent a mathematical equation, in this
scenario you wouldn't be able to claim ownership of things like the
general workings of software (any individual program is already
protected by copyright) or business methods. The U.S. has been a
pioneer in turning those things into new types of intellectual
property; perhaps it's time to declare this experiment a failure.

Another,
somewhat overlapping solution would make it harder to get any patent.
The patent office would apply a higher standard of "non-obviousness" --
the idea that a patent shouldn't reward "inventions" any competent
individual could have thought up. And any outside party could submit
evidence against a patent before it became final.

I am generally sympathetic to Blackberry's plight, in part because I went to school with Jim Balsillie, the CEO of RIM.  One thing Pegoraro missed in his editorial:  The US Patent Office has already said it made a mistake in issuing the original patent that RIM was found to be violating.  The nullification of this patent is working through the system, and RIM is pleading that the injunction against them wait until this process is complete, sort of like a victim on death row begging not to be put to death because the prosecutor has admitted that based on new evidence, he shouldn't have pursued the case in the first place.  RIM has offered to settle with NTP (the patent holder)if there is a give-back if the patent is invalidated in the future, but NTP has refused this.  This all makes for an interesting drama, with a lot of brinksmanship.

By the way, though I am sympathetic to RIM to some extent, that sympathy is diminished by this:

In 2002, RIM sued software developer Good Technology for its wireless
mail-transfer technology and "smart phone" maker Handspring over its
miniaturized keyboard design. Both wound up forking over licensing fees.

As I wrote before, what goes around, comes around when you use the legal system and the long hand of the government to step on competitors.

Personally, I think you are insane to be a CEO or a board member of a public company under Sarbanes-Oxley.  There is no way I am going to sign a document on threat of prison that no one of the thousands of employees who work for me did anything to screw up the books.  Heck, I run a private company owned only by me where there is no incentive other than to report the numbers like they are, I sit next to my bookkeeper who is the only other one who touches the books, and I still find errors from time to time in past periods.

But what got me going on this post was a TV interview I tuned in the middle of last week.  I can't find a version online or even the name of the people interviewed, but the gist of the discussion was how Sarbanes-Oxley was going to prevent Enron-type situations that bankrupt investors.

I wonder how many people believe this?  Because Enron was going down, with or without the accounting shenanigans.  Its trading-based business model followed a life-cycle that should be familiar to anyone who has been in trading -- that is, they had unbelievable margins early on, but as others figured out what they were doing and duplicated it, the margins narrowed.  As trading margins narrow, the only way to maintain profits is to increase volume, leveraging up your capital into larger and larger trades at narrower and narrower spreads.  This volume strategy requires a very low cost of capital, which means low borrowing costs and a high stock price.  By hiding debt and losses in off-book subsidiaries, the Enron managers may have delayed the ultimate reckoning (by keeping equity prices high and its bond yields low), but the accounting games were not the cause of the failure.  In the same way, the march of long distance rates towards zero ultimately brought down Worldcom, not accounting.  In the latter case, if you borrow lots of money to buy long-distance companies, as Worldcom did,  assuming say 20 cent per minute long distance rates and then the rate goes to 5 cents, you are probably in trouble.

I am all for curbing the imperial CEO and giving shareholders and boards more power to police accounting and establish transparency.  I am not sure SarbOx does any of this.  My gut feel is that five years from now we will view SarbOx as more of an enabler for state attorney general self-promotion (as each races to try to prosecute some high-profile CEO for arcane accounting errors) and tort bar shenanigans.

I am honsetly curious, do any of you, as equity holders, feel better about your equities today with SarbOx than without it, especially given the added expense every company has had to take on?  It would be interesting to test the market's perceived value of SarbOx by allowing shareholders to vote to opt in or out of SarbOx.  Not only would their voting be interesting, but, if they opt out, it would be interesting to see if the stock price goes down (meaning SarbOx has perceived value) or up (meaning SarbOx is mostly perceived as extra regulatory expense).

I read an interesting article in the NY Times, via Marginal Revolution, interviewing the CEO of homebuilder Toll Brothers about housing prices.  His assertion was:

"In Britain you pay seven times your annual income for a home; in the U.S. you
pay three and a half." The British get 330 square feet, per person, in their
homes; in the U.S., we get 750 square feet. Not only does Toll say he believes
the next generation of buyers will be paying twice as much of their annual
incomes; in terms of space, he also seems to think they're going to get only
half as much. "And that average, million-dollar insane home in the burbs? It's
going to be $4 million."

I don't necessarily buy this whole story.  For one, Mr. Toll has business reasons for taking a public position that prices will keep rising - after all, his customers buy his product in part as an investment, and would be leery about paying current prices if they thought prices might fall in the future.  Second, as I have talked about a number of times with petroleum, when prices of any product start to rise, observers always tend to underestimate market and technology responses that might bring supply more into balance.

However, the one exception I did make in my oil price posts was that government supply restrictions, both on lands that can be explored for oil as well as things like refinery permitting, may indeed put structural upward pressure on prices.  And in fact, this is where Mr. Toll puts the blame for high housing prices as well:

Toll agrees with Glaeser et
al. that the key force driving up prices is zoning and growth regulations. 
In New Jersey it now takes Toll Brothers up to two million dollars in legal fees
and ten years in time to get the permits necessary to build.

Which got me thinking that home owners (of which I am one) may be the worst rent-seekers of all.  Most people are already familiar with the very large tax breaks for home buyers, in the form of the mortgage interest tax deduction, that is not available to people who rent or to people who borrow for purposes other than home purchase.  However, it may be that a much larger implicit subsidy to home-owners is the government restrictions on new home supply.  By restricting supply, the government is keeping prices up for current home-owners and restricting new entrants who might compete with our homes in the resale market.

I missed it last week, but apparently the CEO's of a number of major US airlines took the PR offensive last week to beg for more government subsidies and pension bailouts.  Reason's Hit and Run has the roundup.  They observe that the Senate was open to their pleas:

But luckily for the money-squandering dullards, there are enough members of
the Senate Commerce Committee who apparently believe certain businesses are too
colossally incompetent to fail:

The Commerce Committee's ranking Democrat, Sen. Daniel Inouye of
Hawaii, agreed: "If we do not begin to solve the problems plaguing the air
carriers, we will see more failures in coming months and certainly more jobs
cut."

Because what is the federal government if not a
guarantor of full employment at lousy companies?... If Inouye and his fellow
hacks were serious, they could start by privatizing airports, allowing vigorous foreign
competitors to own more than 50 percent of U.S.-based airlines, and letting
the failures actually fail, for starters. But that would take a belief in free
airline markets we haven't really seen since the Carter Administration.

It has always been hard to get airlines to just go away.  Pan Am hung around forever, as did TWA, through bankruptcy after bankruptcy.  My guess is that politician's unwillingness to let airlines fail has only increased with the advent of frequent flyer miles - no congressman wants all of his well-healed constituents calling the office and complaining about the 300,000 United miles they just lost.  By the way, have you ever noticed that frequent flyer mile holders are the only creditor of airlines who consistently come out of bankruptcies whole?  Even the worker's defined benefit pension plans get a haircut before frequent flyer mile holders.

Legacy airlines are really backwards in their practices - for example, many of their supply chain processes are reminiscent of the auto industry in the 60's and 70's, in part because airlines are sheltered from foreign competition while auto makers for the most part aren't.  I used to work in the aviation industry, and the opportunities there are tremendous, but no one in the industry will even listen.  The "not invented here" attitude was invented in the airline industry.

And while the management of these firms is backwards, you also have to deal unions a share of the blame.  Union supporters often accuse companies of "union-busting".  I have never heard the term, but in the case of airlines, one might be able to accuse the unions of "company-busting".  Unions hold out and strike for outrageous salaries and benefits and work rules that far outstrip what similarly skilled people make in other industries.  By the way, unlike conservatives, I don't have some deep seated hatred of unions.  In a free society, workers can try to organize to increase their bargaining power.  I do have problems with the way the US government, through legislation, tilted the bargaining table in the unions' favor, but that is a different story. 

For some of these reasons, and others, I was flabbergasted that local company America West would purchase USAir.  When there are so many planes and gates for sale on the market, and cities are begging for new competitors to enter their airline market, why would you buy yourself a load of trouble in the form of legacy union contracts and frequent flyer obligations?  It is noteworthy that Southwest has never bought another airline, and prefers instead just to buy assets out of bankruptcy.

Last week, Tyco's Dennis Kozlowski was found guilty of looting the shareholder's assets for his own personal gain.  Good.  Too many CEO's treat public companies as their own, rather than other peoples' companies for which they have fiduciary responsibility.  And, unlike the Dick Grasso mess I commented on earlier, this was a much clearer case of looting as opposed to just negotiating themselves a good deal.  (update:  Stephen Bainbridge has a different take here)

According to the Wall Street Journal, which requires a subscription:

The guilty verdicts are in for L. Dennis Kozlowski and Mark H. Swartz. For Tyco International Ltd., the company they looted, there may be more court dates to come.

Tyco was hit with dozens of shareholder lawsuits in
2002 and 2003 as the company disclosed waves of accounting problems
that sank its stock. It has restated results several times, going as
far back as 1998. A July 2003 restatement cut about a billion dollars
from pretax profit over several years.

The convictions
lend credence to the plaintiffs' allegations that Tyco was grossly
mismanaged. The suing shareholders already have a strong leg to stand
on: Tyco's string of past restatements amount to an admission that its
accounting was deeply faulty. Shareholders claim they were deceived by
accounting practices that presented rosy pictures of the performance of
the company and its acquisitions, then suffered losses following the
revelation of allegations against Mr. Kozlowski and the restatements.

I have never been able to justify most lawsuits by shareholders against companies in which they own shares.  Any successful verdict would effectively come out of the pockets of the company's owners who are.. the shareholders.  So in effect, shareholders are suing themselves, and, win or lose, they as a group end up with less than if the suit had never been started, since a good chunk of the payout goes to the lawyers.  The only way these suits make financial sense (except to the lawyers, like Bill Lerach) is if only a small subset of the shareholders participate, and then these are just vehicles for transferring money from half the shareholders to the other half, or in other words from one wronged party that does not engage in litigation to another wronged party who are aggressively litigious.  Is there really justice here?

OK, you could argue that many of these shareholders are not suing themselves, because they are past shareholders that dumped their stock at a loss.  But given these facts, these suits are even less fair.  If these suits are often made by past shareholders who held stock at the time certain wrongs were committed, they are paid by current and future shareholders, who may well have not even owned the company at the time of the abuses, and may in fact be participating in cleaning the company up.  So their argument is that because the company was run unethically when I owned it, I am going to sue the people who bought it from me and cleaned it up for my damages?  Though it never happens, the more fair approach would be for current shareholders to sue past shareholders for the mess they left.

The vast majority of these suits are dreamed up by attorneys for the benefit of attorneys.  They help shareholders not at all.

Postscript: There are a couple of circumstances where these suits are entirely justified.  The two that come to mind are:

• Suing a particular group of shareholders who somehow got disproportionate rights in the company or disproportionately benefited financially at the expense of other common shareholders.  A good example would be suing the Rigas family at Adelphia Communications for hosing the minority shareholders.  Note, however, I am talking not about suing the company, but suing certain owners who abused minority shareholders to their benefit.
• Suing to modify certain governance rules that are seen to be unethical or illegal.  I would hope this would be a last resort after trying a number of proxy fights and other remedies, but this can in certain circumstances be the last protection of minority shareholders abused by the majority.

You still hear William Henry Vanderbilt's quote all the time today.  Generally, it is used to comment on situations where public companies dishonor themselves by fraudulently providing poor products and services.  Interestingly, doing a Google search on the term, I also see a lot of usage for it as applied to government as opposed to industry.

Anyway, it is ironic that the origins of the quote are very different than the current usage.  Vanderbilt's New York Central had just canceled an experimental high-speed high-service train from New York to Chicago.  A reporter asked him "Don't you run it (the train) for the public benefit?" and Vanderbilt very reasonably replied:

The public be damned.  I am working for my stockholders. If the public want the
train, why don't they pay for it?

In reality, Mr. Vanderbilt was eliminating a product that had proven unpopular in the marketplace.  His notion of fiduciary responsibility is not only appropriate, but in certain contexts can be argued to be legally required, at least today.  If some reporter today was stupid enough to ask the CEO of a failed dot-com this question (ie, why are you going out of business, why don't you just keep losing money for the public good) would we really criticize the CEO for giving the moron a smartass answer?  Accepting that Mr. Vanderbilt's answer was wrong is to accept that Mr. Vanderbilt should be a slave to public opinion, not as expressed by individuals in their purchasing decisions, but as expressed by an ill-defined elite who seemed to support the service for its aesthetic value.  And by the way, how had a service that didn't even exist a decade earlier, and only existed through the creativity of the NY Central, suddenly become an essential public service and expectation?

By the 20th Century, the high speed Chicago to New York express train  was bread and butter to the NY Central and its arch-rival the Pennsylvania.  In the end, cutting this service turned out to be just a temporary suspension of a product ahead of its time.

Aspiring Governor, self-proclaimed substitute for the SEC, and enemy of Antarctica Eliot Spitzer is about to start a criminal trial against Dick Grasso, former head of the NY Stock Exchange (NYSE). 

And I have no idea why. 

Certainly it has something to do with Mr. Grasso's pay, which Mr. Spitzer thinks was too high.  The NYSE, for those who may be confused, is a private institution owned by some of the richest and supposedly financially savviest people in the country.  The owners or seat-holders select a board of directors, who in turn approved Mr. Grasso's pay package.  I imagine that there are folks who think that the stock exchange is a public institution or uses public money, but it is not and does not, though it does have some quasi-regulatory responsibilities.

The best I can figure it, Mr. Spitzer is arguing that Mr. Grasso somehow tricked these babes-in-the-woods on the board, which include naive and inexperienced people such as CEO's of Fortune 50 companies, heads of investment banks and brokerage firms, and a former US Secretary of State.  Now, I can imagine that the government might have an interest if Mr. Grasso somehow cooked the books to inflate his pay fraudulently.  In fact, the director of HR has admitted he did not give the board all the relevant information, but board members have already said that they did not rely on this person for their information.  Remember that most of the folks on the board themselves get paid in a similar league as Mr. Grasso's pay, so most saw it as a competitive offer, at least until negative publicity caused all the cockroaches to run for cover.

So Mr. Spitzer is starting criminal proceedings against people who he thinks negotiate too well for themselves or are paid more than they are worth.  I am sure glad he wasn't doing this 15 years ago.  I remember getting hired as a new Business school grad at McKinsey & Co. as a consultant for some ridiculous amount of money, and thinking "I can't be worth that!  I don't know anything!  Are they really paying me to tell experienced CEO's what to do?"  Boy, what panic I would have had if I had known there was an AG out there looking to send overpaid people to jail!

The WSJ has a really fascinating editorial that I will link to, though a paid subscription is required (update:  Try this link instead, it may get you there free or maybe here).  The overall picture is one of, if there was a crime at all, the wrong people are on trial.  Here is a taste:

In early June of 2003, when the
membership of the [NYSE] compensation committee changed, the Webb interviews
begin to tell a story of wider board dysfunction. And if there was a
screw loose in this new operation it appears to be not Mr. Langone --
who by all the interview accounts ran a tight ship -- but his
successor, [former New York State Comptroller Carl] McCall. This is a vital point, given that Mr. Spitzer, a
fellow Democrat, did not name Mr. McCall in his lawsuit. What toppled
Mr. Grasso was not the $139 million payment the board approved in
August of 2003 but the later news that Mr. Grasso was owed $48 million
more. Many board members said they didn't know about this payment and
for that many blame Mr. McCall.

The interview notes are rife with comments that Mr.
McCall had little inclination or ability to understand the contract he
took over negotiating. An outside consultant, William Mischell, said
that when he and Mr. Ashen explained the contract to Mr. McCall, "the
meeting . . . lasted somewhere between 15 to 30 minutes, with McCall
making or taking phone calls throughout and not really focusing on the
details." Mr. McCall himself told investigators that "the subject of
executive compensation was entirely foreign to him" -- yet he refused
offers of help to explain the contract to others. When asked why Mr.
McCall was chosen to chair the committee rather than someone more
knowledgeable, Mr. Karmazin told the Webb team that it was an "image
thing" (the NYSE had just instituted new governance standards).

Mr. McCall's excuse for not giving directors
"additional details" about the $48 million or other aspects of the
contract -- which were clearly stated in the text -- is that "he was
not aware of any." That's because, as he admitted, he didn't read the
full document, even before he signed it. Moreover, at least one
director, Van der Moolen's Mr. Fagenson "asked McCall twice to make
certain that all pension plans and other plans were going to terminate
on this date, but stated he never received any updates from McCall on
these issues."

As Mr. McCall went to brief the full board on Aug. 7,
2003, he was given talking points that referenced the extra $48 million
but didn't read these or tell the board. J.P. Morgan Chase CEO William
Harrison noted that Mr. McCall "did not appear to understand the
proposed payout very well. . ." Avon CEO Andrea Jung noted that "McCall
struggled" and that "others were more able to answer questions." Mr.
Karmazin described Mr. McCall as "flustered," and said he did a
"horrible job" of explaining the numbers. Leon Panetta, former Clinton
White House chief of staff, speaking of a later McCall performance, was
blunt: "Carl knew nothing."

The article sums up the Board this way:

The board, which was often
dysfunctional, was stocked with celebrities from diverse
constituencies, many of whom didn't understand the NYSE or take their
responsibilities seriously. Former New York State Comptroller Carl
McCall, who brought Mr. Grasso's contract to fruition, was viewed by
his colleagues as incompetent and, in the words of Goldman Sachs CEO
Henry Paulson, not "financially sophisticated." Former Secretary of
State Madeleine Albright felt she shouldn't "question" the pay; Bear
Stearns CEO James Cayne admitted he "tuned out" of the pay proceedings;
and Van der Moolen Vice Chairman Robert Fagenson suggested the only
real concern was "how this was going to reflect on the Board."

But the interviews also make clear that more astute
board members, such as Mr. Langone, former Viacom President Mel
Karmazin, and former Merrill Lynch Chairman David Komansky, took it
upon themselves to understand Mr. Grasso's contract, and offered strong
arguments for why they'd paid him as they had. "We knew what we were
doing when we paid him. We did it purposely, and we believed it was the
right compensation," Mr. Komansky said in his interview

In this environment, Grasso is culpable, how?