Business Law Prof Blog

Univ. of Colorado and the new "Chair for a Conservative"

My old place of employment made the front page of the Wall Street Journal yesterday by announcing a new Chair for a Conservative Thinker.  There are so few conservatives on campus that the provost has decided to use reverse affirmative action to recruit one to have around.  The faculty is upset, for the wrong reasons, of course.  There are very few conservative tenured professors on campus and those that do exist are not really true conservatives, they are moderates.  Any real conservative -- anti-affirmative action, anti-abortion, Evangelical, anti-social programs -- would suffer constant abuse there.  I was labeled a conservative when there and I was not -- I happened to be for smaller government.  A real conservative, articulate and outspoken, would blow the place up.  The solution is not affirmative action for conservatives, no good conservative would take the chair, but a re-evaluation of the slanted hiring process that brings only soft and hard left candidates to the faculty.   The faculty has suggested that the Chair could hold a liberal who "studies conservatives" like Margret Mead studied the Samoans.   Isn't that precious.

Colorado is not alone.  My niece goes to a school on the east coast that had an announced "Be Good to a Conservative This Week" campaign.  The general population has an inkling of the problem on many college campuses but no sense of its depth.

Congratulations to the Moritz Class of 2008

Saturday was the graduation ceremony for the Moritz Law School Class of 2008.  All those attending had a great time.  Thanks again for the honor of selecting me to address you so that I would embarrass myself once again in public.  Anyone in the class who wants a copy of my remarks can email me.  Dale Oesterle

We Are Not in a Recession

The Commerce Department released preliminary data on the GDP for the first quarter of this year.  It showed a growth rate of .6% [corrected].  Granted this is not stunning but is it not negative -- we are not now and have not been in a recession.  We are in a slow growth period.  The press and politicians have claimed we are in a recession since summer of last year -- it is false and has been false.  Why the hysteria?  Media likes crises to sell ads and out-of-power politicians like bad times to advocate change and get votes.  Folks, we are not in a recession. This is good news--except to scare mongers.   

Liberty Mutual to buy Safeco

On Wednesday, property and casualty insurer Safeco Corp. agreed to be acquired by Liberty Mutual Group in a $6.2 billion deal.  The acquisition would make Liberty Mutual the fifth-largest property and casualty insurance-provider in the U.S. and the second-largest surety insurer.  It is an odd time for such a large deal in the insurance business given the current distress in the financial community.  Moreover, the deal will have to survive anti-trust analysis by either the DOJ or the FTC.  Perhaps they are anticipating tougher anti-trust review under a Democratic administration. 

Hedge Fund Mavericks

Reading about David Einhorn of Greenlight Capital is a delight.  He is a maverick with strong opinions on the SEC, boards of directors, and the fed.  A financial system that can supports such folks (as opposed to concentrations of power in big banks) is a national treasure.

Student Loans: Wrecked

Right-thinking people have long fussed about the "burden of student loans" on idealistic young students who want to go to school on other people money and do "do good".  We have devised forgiveness programs and capped interest rates.  The wife of Barack Obama has made some famous (infamous) comments on the matter.   Well -- not a problem any more -- there are no more loans at all.  We have so regulated them that the banks have pulled out -- they cannot afford to lose money on every loan-- particularly in an economic slowdown.  Whatttt????  Now students will have to pay their own way or get loans from universities directly.  Idealistic young students will have to work for a while to earn tuition and go to state schools.  They will not be able to go to Princeton and Harvard on other people's money and then complain about repaying loans well into their forties.  Maybe there is a bright side to all this. 

Standford Gets $100 m from Exxon Mobile

Standford had cut a deal with Exxon Mobil for running a collaborative research facility.  The deal with worth $100 m over 10 years.  Many other universities are doing similar deals and it is not limited to technology research.  A well known Midwest University has cut a deal with a hotel chain to investigate hotel management efficiencies.  In many of these deals a university builds two or three new buildings and none contain a single classroom;  they are research factories.  The potential conflicts are obvious -- does the private sponsor have power over who uses the new facilities and what they do.  In other words, does the private sponsor have control over university personnel.  The university says no -- reminds me of denials involving student athletes and big time football programs.  But a larger problem perhaps is whose ox is getting gored.  Private companies are doing this to save money on internal research.  Who is paying for the savings?  The university's other constituencies, of course, which include tuition paying students (in a variety of ways other than cash, including access to well known professors), tax paying citizens that grant universities tax free status, and alumni that give deductible money to their alma mater.  The private companies are getting a deal based on contributions from students and tax districts and alumni.  A serious question is whether these other constituencies know of the cross-subsidy.  Is it in student prochures and alumni development literature.  Of course not. 

Cutting Through the "Interpersonnal Skills" Myths

The Wall Street Journal reports that CEOs that have certain traits (persistence, attention to detail, efficiency, analytical skills, and setting high standards) do much better than those that feature the common traits pushed by many academics in business and law schools (strong oral communication ability, teamwork, flexibility/adaptability, enthusiasm, and listening skills).  Some academics even claim the later skills as gender related.  Once again the world has intruded on wishful theory. 

Supreme Court and Business

It was inevitable -- the Supreme Court is under attack by the popular press.  The Court's decisions on social issues has upset the fair minded.  One of the attacks is interesting; separate the Court from its political base by labeling it pro-business and anti-shareholder.  Even conservatives are pro-shareholder.  The attack is transparent.  Shareholders as well as businesses are better off when frivolous litigation is harder to bring.  The balance between legitimate and illegitimate lawsuits is important to shareholder value.  The court, by adjusting the balance, if it is correct, is not anti-shareholder; it is pro-shareholder. There is no evidence that the Court is biased toward or corrupted by big business; such challenges after the public legitimacy of the court and should not be lightly made, especially to serve other social purposes.  We have come through an era when many have come to believe that the court, like a kindly grandfather, is the repository of whatever is fair.  Jurisdiction, separation and balance of powers, executive or legislative prerogative, federalism, and limited judicial factfinding are concepts for wimps; the court should declare what is just and fair and tell everybody else to stuff it.  If the Court does not do what you think is fair (long statutes of limitation for discrimination actions), scream about it and impugn the integrity of the justices who do not do what you want.  That's the ticket. 

The Roberts court has a better sense of what the Court is and should be; now we need the press to educate the public not to mislead them.

Closing Schools, Churchs and Military Bases

Main line religious denominations are struggling with declining membership in the United States; public school boards are struggling with demographic changes, people are moving from old neighborhoods into new ones; and the federal government still has too many military bases.  Try to close a failing church or a school with too few students or a military base that is not cost effective.  Bishops, school boards and Congress will each all face irritate and angry protests from local beneficiaries, who pay less than they receive and demand that it stay that way.  The incentive of the decision makers (who do not get paid based on cost reductions) is too avoid such controversies and carry the old facilities, bleeding the rest of the system, until the death of the local facility is undeniable.  It is very, very  tough for not-for-profits and for governments to make reallocative changes once buildings get on the ground.  It is another bit of evidence favoring, when possible, capitalism in allocating assets, based on the profit incentive.

University Spin

In Friday's Wall Street Journal we have yet another article on University marketing tactics.  Daniel Golden's "To Boost Donor Numbers Colleges Adopt New Tricks."  In an example of revenue smoothing that would put major corporation fraudsters to envy, we have universities spreading very small donations, $30, over five and six years to claim the donor in the percentage of alumni giving figures in later years.  There is no authority, other than public embarrassment when practice come to light, to hold universities accountable for gross distortions by some of what they are and what they do.  Just ask the folks at U.S. News & World Report.   There are well know "tricks" in post graduate employment numbers and in mean standardized test scores, among others.  How ironic that academics, that call for sanctions on private business who are subject to a plethora of anti-fraud rules, live in institutions that often would not satisfy the basic standards of Rule 10b-5 when it comes to sending in numbers for ranking services. 

Stanford President's Conflicts of Interest

Last Saturday's edition of the Wall Street Journal contained a long story ("The Golden Touch of the Stanford President") detailing how the President of Stanford, with an annual salary of $616,000 a year, had netted over $43 million in outside business activities during his five year tenure.  The uncomfortable parts of the story described personal investments and involvement in companies that either did business with his University or that were the subject of investments by his University's private endowment funds.   Both these activities represent conflicts of interest that the university itself, through its governing board, had to ratify given a full disclosure on the facts of the President's involvement.   There is no mention in the story of such board authorizations.  What is common practice for private corporations when CEO's operate under a conflict of interest should be applied to our large non-for profit organizations as well.      

Data on Income Inequality

The best description of the data on the degree of income inequality in the United States comes from the book by Alan Reynolds, Income an Wealth (Greenwood Press, 2006).  He takes a careful look at the data and concludes that the percent of income claimed by the top 1% earners in the United States has not increased since 1988 but has decreased.  His columns in the Wall Street Journal of February 6, 2007 and Dec. 16, 2006 explain why popular studies on which the press bases its claims on increasing income inequality are flawed.  The core of his claim is that raw income tax data is misleading and once one adds in various other assumptions to make the data more usable, the assumptions are critical and often loony.  The Congressional Budget Office study for example, added an assumed percentage of capital ownership to the top 1%, and the assumed percentage itself increases with time, leading, naturally to an increase in the income of the top 1%'s income.  The CBO study also shows, for example, that raw disposable income of the top 1% did not increase from 1988 to 2003 (the 2004 data reflects a new lower tax on capital gains).  Many simply want to believe that the rich are getting richer, it is a convenient political argument; but a careful dissection of the data shows, at minimum, that the position is contested. 

Income Inequality

Heading into the President election of 2008 we already know that income inequality will be a big issue.  I have already noted that income inequality figures come from tax data that contain many problems (much income is note included).  I have also argued that some inequality may be an inherent part of the incentive system in a technology sophisticated, creative economy.  New studies also show that whatever income inequality there is may be explained by simple demographics:  As a nation state's age grows its income inequality grows (older folks are wealthier) and as a state's education grows its income inequality grows.  Unless we want to outlaw age or education, income inequality growth may be, well, natural -- a statistical illusion.  Gets votes though.

New Wall Street Journal Format

With much fanfare, the Wall Street Journal published today its first "new look" edition.  The paper is smaller, snappier, and have better section  first page summaries.  What is most of interest is the paper's heavy integration with two on line sites, WSJ.com, and WSJMarkets.com.  I now seemingly must read the paper in front of a computer terminal to get the full benefits of the change.  Will this save the printed version or just be a step in a final transition into a full on-line paper (with a printed version done as a supplement for market coverage)?  I suspect the latter.  It is the building of the useful websites that is the real value here.   

Ford

I think I have this right:  Ford is raising $18 billion, mortgaging everything everywhere, in order to spend $17 billion in a restructuring to stop its current revenue loss of close to $10 billion a year.  38,000 employees, a startling percentage of Ford's workforce, have headed for the exit, taking Ford's buyout offer.  [This is a class action suit waiting to happen. Those that have left will sue if the company does well (company lied) and those that remain will sue it if does not (company lied).]  So the new creditors are betting that Ford will service the new debt with its new profits generated after the turnaround that will follow the restructuring.  Its new products that will produce the profit look like Lexus knockoffs (the knockoff strategy worked for Japan in the 70s).  I hope the creditors will enjoy running their new automobile company in a year or two.  I will take the Jaguar division if they want to sell it for a couple of bucks plus an assumption of its obligations.

The Facts on Income Growth

The new tax data shows the following:  1) Average income rose 27 percent (in real terms) from 1979 to 2004.  Only those in the top 5 percent had significant gains, however.  One third of the entire national increase in reported income went to the top 1 percent; one-sixth of the total increase went to the top one-tenth of one percent.  2) The data from 200 to 2004 shows a different trend, however.  The bottom fifth has an average income gain of 2.4 percent while those in the top one-tenth of one percent reported average income losses of almost 17 percent. 

Income Inequality Cont.

Professor Shane's comment to my earlier post on income inequality cites a favor study of the left -- the value of college degrees is failing.  The claim in only partially correct.  The value of PH.D's, MBA's, JD's and MD's is up over 10%.  It is the value of undergraduate degrees that is failing (by 3%).  I suspect that undergraduate degrees divided by majors would find the same division.  Undergraduate business degrees are worth more while political science degrees are worth less (and communication degrees are worth little). The fact of the the matters is that some education is valued and some is not and our economy.  Those who chose correctly are rewarded; lose who waste their time are not.

Income Inequality

The left is using statistics on income inequality to anchor their arguments on the appalling state of our political system.  A few of the many arguments go something like this:  1) Their is no inclusive political dialog; "the [insert group] are left out" and it is getting worse. Proof: Increasing income inequality.  2) Our elites are "more untethered" than every before.  Proof: Increasing income inequality. 3) The current political "regime" in power is pro-elite and cares little about the poor.  Proof:  Increasing income inequality.    And so on.   

Do the statistics support the many versions of the argument?  There are four complications.  First, there is no good data on what we really want to measure, pure wealth.  What we want is a calculation of total wealth and statistics on how total wealth is distributed.  We don't have it.  Income data is a poor substitute for pure wealth data.  We use it because we have data on income from tax records.  Income data includes salary, dividends, and gains from the sale of assets but does not include the value of held assets.  (It may understate the position of those in the top bracket.)  It also does not include illegal income (drugs or cash payments to undocumented workers) or shadow market income (trading assets and services).  (It may understate the position of those in all brackets to varying degrees.)  Most agree, however, that, given the data problems, the amount of wealth has 1) grown and 2) the distribution of the gains has not been even.  A disproportionate amount of the gains is enjoyed by the those in the top brackets.  Second,  there is a debate on causes on the "uneven distribution."  This is the blame game.  Some theories include blaming a loss of jobs due to outsourcing (shown to be false), immigration, decline of unions, inadequate public policies for the working poor, the greed of executives and so on.  Data mining explodes some of these.  For example, middle class income has increased not decreased in the 90s, outsourcing has cost us only a small number of jobs, worker income as a percentage of the GDP is about the same as it has always been, and those who seem to have gained the least are not union workers but upper middle class white collar types who were never unionized.  More important is data showing that the income gains are concentrated among those with high level skills (smart folks) and in only five counties (that feature the high tech types).  Those who gained may have "earned it" and we should not worry so much.  This argument leads to position three: there is statistical evidence that there is significant opportunity to move among the brackets.  The membership in any one bracket is fluid to some extent.   There is less social "lock in" that there has been in the past and, for that matter, in any large society in world history that is not based on warfare (taking stuff my force).  There is .... opportunity.  This leads to position four:  The analogy that explains the wealth increase distribution is the modern hedge fund.  One fellow, the manager, puts in a little and takes 20% of the gains while the passive investors put up 95% and take 80% of the gains.  If the hedge works and everyone benefits, their in an increase in wealth inequality -- the manager makes huge amounts and the investors make plenty as well.  The investors do not worry about the new unequal distribution of the new gains; their gains are sufficient to make them happy.  Worrying about an equal distribution would kill the incentives that create the gains in the first place; the managers take huge risks and sweat bullets to get the fund to work. In other words, the economic system that makes everyone marginally better off over time may depend on rewarding some folks (who run the engine that drags the train) with disproportionte returns.  If the analogy is correct we need to look at the position of those in the lower brackets.  Are they better off even if they are in the lower bracket?  This kind of analysis makes academics very uncomfortable and many will not do it.  The analysis looks mercenary and cruel.  If someone in the lowest bracket has a beat up but functional old car are they better off than those in the 80s who generally did not have any cars? Moreover,  the purchasing power of the lower bracket is affected by ... well  ... WalMart.  Quality food and serviceable clothes may be cheaper (whether purchased or donated).  This kind of analysis opens one to snipping by the left ("you are rich and don't know or understand"; "poor should have [health care, or...] and don't how can you say they are better off".... and so on) and there is no good answer.  Those in the lower bracket will have less than we are comfortable with.  At issue is, without the incentive struture that we have, would they have even less?

In any event, this debate is important.  The income inequality claim fuels current political claims for dramatic social changes.  The left believes the phenomena is a debate stopper.   My point is that the argument on the data needs to be joined.          

Joseph Stiglitz on Globalization

I participated in a conference with Joseph Stiglitz several years ago on the causes of the 2001 high-tech crash.  I am a great admirer of the work that won him the Nobel prize, the effect of asymmetric information in bargaining, work that looked carefully at bargaining details in context.  At the conference he ripped corporate executives, no surprise there, but then decided that we need to lift the business judgment rule for executives.  Executives would be liable for ordinary negligence in court (as opposed to gross negligence).  Whoa...  In private conversation I asked him whether he wanted judges to run United States corporations.  He said, "of course, not"... I asked him to think of how his recommendation would play out in practice.  Lost on him.  After the conference I read his two new books; both are full of this kind of logic -- see a big problem; propose feel-good, grand scale institutional solutions that demand wealth redistribution; ignore the practical details in how we create or maintain the solutions.  His demand, for example, that the United States cede sovereignty to an international tribunal to enforce his new global rules overlooks the minor detail of how to select the judges.

Pity. His Nobel prize winning work was the reverse -- look at the details of bargaining and minutely assess the effects of changing the informational context.   

ABA Committee on Executive Signing Statements

When the President is confronted with a law from Congress that he thinks is, in part, unconstitutional (it impedes executive prerogatives, for example) but he respects those parts of the law that are constitutional, what should he do?  1) Veto the entire law (he has no line item veto)? 2) Sign the law, enforce the entire law and bring an lawsuit in federal court to have the unconstitutional parts stricken?  3) Sign the law, enforce only the parts he believes are unconstitutional and not those that he believes are unconstitutional?  The ABA wants him to do 1) and not 3), even though Presidents have done 3) for ages.  What galls the ABA is that the President does 3) and announces it when he signs the bill -- he is transparent.  He is signaling to Congress and others that those who object to his position can take the case to the Supreme Court. [They are correct here however that the Supreme Court should recognize Congress's complaint as a "case and controversy".]

The ABA Committee has decided this transparency is a threat to the constitution.  Better to sign the law and then issue an internal memo to Justice not to enforce it??  If 3) is a constitutional option, and it is, then an open signing statement is the best way to announce the administration's intentions.  The Committee (look at its membership) is anti-Bush.  When Clinton did this in the backroom it was fine but when Bush does it out in the open, it is "a strategic weapon."  Please.

University Financial Shenanigans

The elite Universities are selling bonds in a big way.  Here's the racket.  They offer tax exempt bonds and use the money to invest in the higher yield taxable markets.  They cannot do so directly, it is illegal, so they do so indirectly.  The universities raise money through the bonds, use the proceeds to build a building, hedge the interest-rate risk in swaps, then use endowment money saved to invest in the taxable markets.  Sweet.

Cost of Oil

The high cost of oil has led many companies to improve their energy efficiency, reducing consumption of oil and shifting from hydrocarbons towards cleaner alternatives.  The environmentalists are happy. See Climate Group, "Carbon Down, Profits Up" (2006). 

Da Vinci Code Opinion

A London judge, Justice Peter Smith, deciding the recent "Da Vinci Code" copyright infringement case for the defendant (Dan Brown), embedded a code into his opinion.  His 71 page ruling contains italicized letters in the text.  On page 51 he notes that one must read the two books in issue, "holy Blood and the Holy Grail" and the "Da Vinci Code,"  to solve the puzzle.  The quirky opinion is a classic and will join other top ten quirky opinions in Ango-American jurisprudence (Justice Blackman's baseball hall of fame in the baseball antitrust exemption case; Chancellor Strines' opinion in Tyson Foods (I am "torn about the correct outcome"but -- will bring the hammer down) and Judge Owen's opinion in Alaska Hardware (I note on the Internet that the defendant sells crack cocaine...).  Any other favorites?

France

When I attempt to teach my students "Law for Business Associations", which is applied capitalism, I find that I have to explain what capitalism is and what it is not.  Part of my schtik is to mention that France has 12% unemployment; 23% unemployment in youth 18-14; and 55% unemployment in minority youth.  Ours is 5%; 12%; 25% (??) and we would riot -- be in the streets-- if we had France's numbers.   Have to change the schtik.

Cheating in Bobsled and Nascar

I read that there are hundreds of pages of regulations on bobsled construction and that inspectors use laser technology to check runners.  Even then some folks still believe that the Germans have illegal "hot runners."  The rules have locked bobsleds into old world technology; shock absorbers are illegal and aerodynamic cowlings are illegal.  Like all rules there are some curious points:  One can use exotic metals in the runners as long as one does not use exotic coatings on the runners.  Nascar has its own cheating scandal this week.  The crew chief of the Daytona 500 winner was suspended for the race and three more races for a very clever mechanical device that changed the contour of the rear window after tech inspection.  Nascar racers are stuck running old push-rod V8 motors (Toyota will enter the competition running a motor is does not make -- all its motors are overhead cam motors) and obsolete suspension systems.  I race autos myself, both in SCCA (I run a spec Mazda miata) and in vintage racing (I run a 1966 Triumph Spitfire), and rule violations are a constant source of discussion and irritation.  My children's participation in the All American Soap Box Derby and in the Cub Scout's Pinewood Derby raise the same issues.  What are the limits of the rules?  I find a similar problem in all these events:  the rule makers are too aggressive.  Short of providing spec cars (or sleds) for all competitors (as they do in the IROC races), the rule makes aim at having competitors all privately provide spec cars for themselves.  The rules lock in old fashioned technology and get more and more elaborate in an effort to stop anyone's equipment edge.  Enforcement lags behind the rules, giving competitors the choice of violating rules and not getting caught or acting on their honor within the rules.  Is anything not caught legal?  [The old Nascar adage.] Or should be all be "good citizens"?  In practice in such situations, all winners are suspected of cheating (some do); and sore losers start cheating rumors. To little thought goes into the benefits of encouraging innovation.  I think the bobsled rules are too tight, too complex and too old.  Either provide spec sleds or let the competitors run most anything without a motor or do  both (have a spec competition and an open competition).

Book on Stock Investments

Best book on stock investing?  Edwin Lefevre, Reminiscences of a Stock Operation (1923)(about Jesse Livermore).  1923?? Yes.  The motives stay the same; the names and types of the investments change.

Google

I love the quote from Paul Saffo at Silicon Valley's Institute for the Future:  "Google is a religion posing as a company."

Farmers and Small Business Cheats on Taxes the Most

A report on tax cheating by the Commerce Department found that, in percentage terms, the biggest tax cheaters in the United States are farmers, who fail to pay a huge 72% of the taxes they owe.  The cheating from unicncorporated businesses (including partnerships) cost the government $68 billion in 2001, the largest absolute revenue loss of any group.

Cramer's Darling RHEO Tanks...

Posted by Jason R. Job

I first must admit that I am somewhat of an addict of Jim Cramer's tv show "Mad Money."  I have been known to run home in order to catch an episode instead of doing other things.  However, I feel that I get more out of the show by watching Cramer's performance and listening to some of his investing tips rather than listening and trading on his stock picks.

Today, OccuLogix (NASDAQ: RHEO) reported that its late phase trials of its Rheo procedure failed to reach its goals.  As a result, OccuLogix is trading down $8.50 or approximately 66%.  I remember paying special attention to Cramer's discussion on this stock in early January (1/12/06 to be exact), because I am a shareholder of OSIP which makes a drug for wet age-related macular degeneration, while the Rheo procedure was supposed to treat dry age-related macular degeneration.  In his discussion, Cramer touted the market share which could be obtained if this Rheo procedure actually worked.  However, when OccuLogix reported that the Rheo procedure was unsuccessful, it topped the list of Cramer's worst picks.

Now, I know that Cramer has been trying to be more open about not purchasing stocks on a so-called "Cramer Pop" and to use limit orders.  Additionally, Cramer constantly reminds viewers that you must do your homework before investing in a stock.  Nevertheless, when Cramer's picks have days like today, I am just waiting to see the first lawsuit brought by a viewer who lost large sums of money based upon Cramer's stock picks.  I know that there are disclaimers before the show begins; however, I am always distracted by Jim's head spinning with a countdown on his forehead, so I have not had the opportunity to read all of them.  But, I am sure that at some point someone will attempt to sue Cramer; it is just a matter of time.

Update: Tonight on Mad Money, Cramer did mention that he screwed up his choice of RHEO.  Being typical Cramer, both his bobble head and he had post-it notes on their forehead with RHEO in big black letters.  Cramer also apologized and mentioned that he was not always correct.  Unfortunately, other than his choice of Dick's Sporting Goods back in August of last year. (see related post Mad Money Makes Some Mad).

Regular Religious Worship Correlates with Higher Personal Income

Jonathan Gruber, an economist at MIT (Massachusetts Institute of Technology), has an new paper finding that doubling religious attendance raises one's income by almost 10%. Religious participation is also correlated with lower rates of crime and drug use and higher rates of school attendance.  "Religious Market Structure, Religious Participation and Outcomes: Is Religion Good for You? NER Working Paper 11377 (May 2005).  Gruber offers several possible explanations:  Going to religious worship raises "social capital" (networking); enhances mutual emotional and financial insurance; or provide emotional balance for life's inherent travails.

New York Times Obit Page

Check out today's obituaries in the New York Times.  There are obituaries of Candy Barr, a stripper, and Frank Wilkinson, one of the last two jailed by the House UN-American Activities Committee for refusing to testify. Both life stories are fascinating and well done. The NYT obit page, no longer just for dignitaries and wealthy industrialists, has turned into some good reading.

Red Zone LLC Puts Pressure on Six Flags

Posted by Jason R. Job

On November 8, 2005, Dan Snyder's, Red Zone LLC sent a letter to shareholders of Six Flags Inc. (NYSE: PKS) to convince shareholders to vote their shares to oust three non-independent directors from the board of Six Flags.  Specifically, Red Zone hopes to oust Kieran Burke, the Chairman and CEO, James Dannhauser, the CFO, and Stanley Shuman, who the letter to shareholders states is "an investment banker who has a serious conflict in his dual role as board member and managing director of one of the company's financial advisors."  (A copy of Red Zone's Letter to Shareholders can be found here).

For those of you, who are not up to date, basically, back in August, Red Zone initiated a tender offer to purchase 34.9% of the outstanding shares of Six Flags at $6.50 a share in order to unlock potential shareholder value.  After Red Zone initiated the tender offer, Six Flags' Board instructed shareholders not to tender their shares because the Board was looking for potential buyers for the company.
 

During Six Flags' conference call on Tuesday, Burke responded to Red Zone's tender offer and urged shareholders to allow Six Flags to complete the process of selling the company.  In the conference call, Burke said, "I am confident that we will have an attractive transaction to recommend to shareholders by the end of December." 

In response, Red Zone's letter to shareholders noted:

"It has been two and a half months since the company began its "prompt and orderly" sales process and now management is saying that although some unknown number of "initial bids" have been received it will be at least another month before "final bids" are received and two more months before a decision is made on a possible sale. This timeline conveniently coincides with the deadline for shareholders to respond to our consent solicitation and effectively pushes any hope for a conclusion to the sale process into early 2006 when we believe Burke and Dannhauser could stand to gain an additional $10 million under their golden parachutes. Don't be misled by management's vague statements about its over-extended sales process. As the largest stockholder of Six Flags, we are skeptical that management's process will result in an attractive offer for your shares. In our view, the true purpose of the sales process is to stall and delay your vote on the performance of this board and management by creating high hopes among shareholders for as long as possible."

It certainly appears that Six Flags' Board is buying their time to cash in on the additional $10M in compensation.  And, Red Zone has received some public backing from other shareholders.  Last week, Diaco Investments LP, which owns about 9.8 percent of Six Flags stock, threw its support behind Red Zone, saying that it opposed a sale of the company. 

On Wednesday of this week, Tigris Management issued a press release stating that it would vote its shares in favor of Red Zone's solicitation because:

Not voting for Red Zone means voting to retain the current management team of Six Flags. This is the same team that posted six straight years of operating losses, culminating with an equity-linked share offering that effectively diluted shareholders by a third; current management has been unable to stem the 90% decline in Six Flags' shares, to $3.49, until Daniel Snyder started buying the shares last year.

Tigris Management also noted it believed that Red Zone's track record would allow it to unlock potential shareholder value.  Also, Tigris noted that it believed "that Six Flags shares can trade at $17.50 if the company is managed as effectively as comparable theme park operator Cedar Fair, L.P."  Finally, Tigris believed "based on Red Zone's history of value creation, values in excess of $33 per share can be achieved."  Shares of Six Flags currently trade at $7.32.

In response to Tigris' statement, Six Flags issued an additional press release, on Wednesday, which can be found here.  In its press release, Six Flags noted that Tigris did not disclose any of its Six Flags shareholders nor is there any public information regarding Tigris' activities or assets.  In response, Tigris amended its statement stating that Tigris' Managing Partner, "Murat Azizoglu, Ph.D., in a personal investment account. There are 4,000 shares in this account, which Dr. Azizoglu acquired on September 7, 2005, at a cost of $7.05 per share, as a potential long-term investment."  It is also worth noting that Bill Gates has an 11.5% stake in Six Flags and last year said that he was dissatisfied with the current Board's performance.

Today, Six Flags sent a letter to shareholders, again urging shareholders to wait until the Board can complete the sale of Six Flags.  A copy of the letter can be found here.  Six Flags' Board reminds its shareholders that Red Zone is attempting to gain control of Six Flags without paying full value for the company.  Six Flags desires that its shareholders wait until the potential sale process of Six Flags is completed, and if they have signed the "white card" in favor of Red Zone's plan to vote out the non-independent directors, then the shareholders can fill out a new "blue card" to revoke the votes in favor of Red Zone.

The activity between Red Zone and Six Flags shows the hostility that can occur when a large shareholder or shareholders come in and attempt to throw out the old board of directors to make changes in a company.  Unfortunately, for the targeted board of directors of Six Flags, the voting requirements allow shareholders to remove them from the Board.  Ultimately, as long as Red Zone LLC and other shareholders provide enough votes to oust the targeted members of the Board, then that is what will happen.  However, Six Flags' Board will attempt to find a potential purchaser and perform a merger which will not allow its common shareholders to vote.  Thus, allowing it to sell the company without funds like Red Zone to stop the merger.

Anyways, it will be interesting to see what happens, but either way, it is a great example of how private equity can influence public companies.

Related Earlier Posts:
Redskins Owner Ups His Bet on Six Flags
Six Flags Response: We're For Sale

In full disclosure, I do not own any shares of Six Flags, Inc.  Also, my comments are not intended to be a recommendation to buy or sell shares of Six Flags.

The Yale Endowment

Ben Stein has written an amusing two columns in the NYT on the Yale endowment.  In his first column Mr. Stein, a Yale Law School graduate, noted that the widely successful Yale endowment had made an over 9 percent return last year (the market lost 15) and was worth somewhere in the neighborhood of $16 billion.Article  He also mentioned the healthy salary of the endowment director, David F. Swensen, a salary ten to fifteen times that of the President of the School.  He wondered why any alum would contribute to such a fund -- contributions would only be a "drop in the bucket."    Well, the Yale public relations machine struck back and in Sunday's NYT Stein capitulated ...

   He recanted, noted his memories at Yale, the importance of his education, and that "loyalties transcend economic theory."  He also noted that Swensen was "if anything, underpaid."  He ended by saying "I'll keep giving to Yale, and with a full heart..."

    Too bad.  The argument is that our major universities are running hedge funds with contributors' money.  The hedge funds are dominating the universities' planning priorities and corrupting their function -- not unlike like big time football programs.  The money should be spent, principal and all, on the universities' educational functions and mission.  It should not be hoarded to grow over time with its income dribbled out into the operating budget.  These multi-billion dollar endowments that are managed to grow in perpetuity, rivaling the gross domestic product of third world countries are an embarrassment.  In this regard, the Yale Music School has used its new 100 million dollar grant to simply waive student tuition.

The educational function of universities is being corrputed by professional athletic programs, by long-lived research partnerships with private industry, and now by internal hedge funds.  At some point teaching undergraduates will be just a nuisance.   

Why did Mr. Stein change his tune?  The Yale network of alumni, which is a very valuable one, has its own enforcement mechanism.

Ronald Frowns on Hedge Funds

As discussed in Prof. Oesterle's post, Will Ronald McDonald Put on His Smiley Face for the Hedge Funds, Pershing Square Capital Management has been accumulating at stake in McDonald's and there had been speculation that Pershing Square would perform the same action in McDonald's as it had done with Wendy's.  As discussed in Prof. Oesterle's post, Ronald McDonald Part II, Jesse Eisinger, in a Wall Street Journal article, described how Bill Ackman, the hedge fund manager at Pershing Square had intended to with McDonald's.  According to the Journal, Ackman wanted McDonald's to spin off its franchise management business as well as create a real estate investment trust for its real estate holdings.

However, today, McDonald's CEO, Jim Skinner, sent a letter to the McDonald's System.

In the letter, which can be found here, Skinner states the following:

"I want to comment on recent speculation in the media about the possibility of a major restructuring of our Company. As a public company, we are continually looking for ways to enhance shareholder value. This is reflected in our recent announcement which stated we expect to return between roughly $5 and $6 billion to shareholders over 2006 and 2007 combined, through dividends and share repurchase."  He continues, "we have no intention to undertake a large scale restructuring either through a McOpCo spin-off or a Real Estate Investment Trust (REIT). Neither would be in the best interests of our system or our shareholders."

Clearly, Skinner has no plans to spin off either the McOpCo, the franchising business nor the real estate of McDonald's.  Also, Skinner states that keeping both of these companies in house will be in the best interests of McDonald's shareholders.  Nevertheless, after Skinner's announcement shares of McDonald's dropped over a dollar.  Granted, most of this buying and selling could be considered "knee jerk" reaction to Skinner's annoucement, but it makes one question whether shareholders actually believe keeping McOpCo and the real estate assets in house is in the best interests of its shareholders.

Also, it will be interesting to see if Pershing Square and/or other hedge funds come in and put more pressure on the board of directors.  It appears that the hedge fund rumors in the press were causing enough problems and speculation that Skinner felt that he needed to stop the rumors.  It seems that Skinner's statement was made with the hopes of getting his "team" refocused on McDonald's impressive, continuing growth plans, instead of wondering whether the "nasty" hedge funds are going to come in and cause disruption and job losses in order to unlock shareholder value.

All I know is that time will tell.

[Jason Job]

In full disclosure, I personally own shares of McDonalds in a retirement account.  Also, I am not recommending the purchase or sale of the stock.

Miers' Withdrawal

Posted by Bill Sjostrom

Well that was certainly anticlimactic.  Now what are we supposed to do with our free time?  The Plame affair?  More blogging about municipal bond flipping?

In a somewhat perverse kind of way, I was looking forward to the Miers hearings.  Unlike Larry Ribstein, I do occasionally watch reality shows (Survivor in particular).  With the withdrawal, we've lost out on daily CSPAN episodes of “Harriet Miers' final tribal council."  Atleast it's still football season.  Go Irish!  Go Bengals!

Westlaw Drops Wall Street Journal Database

Have you noticed that Westlaw no longer has a database of full-text Wall Street Journal articles? Neither does Lexis. I am very annoyed by this as I frequently used the database for research. I called West looking for an explanation, but the person I talked to had none, although she did point out that Westlaw does have a WSJ abstract database. Whoopity doo! 

If you have a print WSJ subscription, as I do, you can do a free full-text search at wsj.com. But to access an article over 90 days old you have to pay $2.95, the search engine is not as sophisticated, and I do not think the database goes back as far. I suspect WSJ figured it could make more money through its own website than what Westlaw was paying, and Westlaw balked at paying more. Please complain to your Westlaw rep about this.

[Bill Sjostrom]