Hope is not a plan

If you've been following business news over the last year or more, you'll know that Airbus is seriously, seriously behind on its A380 superjumbo. These delays have led Virgin Atlantic to defer their purchase of four A380s by four years and threats from Emirates to cancel some of its substantial order for forty-three A380s.

This week, one customer -- Fedex -- did go ahead and cancel its order for ten A380s, indicating the delays as the reason. Fedex has instead ordered fifteen 777s from Boeing, with an option to buy another fifteen. Airbus continues to face problems with its other customers -- fifteen in all, with one hundred fifty-nine planes on order -- who are currently believed to be pushing for renegotiation to a lower purchase price.

I'm sure Boeing is waiting on the edges for more customers to hemmorhage off of the Airbus order.

The BBC story

Or for logical reasoning, either.

Van Jolissaint of Chrysler attacked "chicken little" concerns about global warming at a "big three" economists meeting featuring the head economists from Chrysler, GM and Ford. From the BBC report:

Mr Jolissaint was particularly scathing about the Stern Report, which was recently published by the UK government.

Mr Jolissaint said the report was based on dubious economics, did not include a discount rate, and was written by an informal adviser to Gordon Brown - in fact, at the time of the report, Mr Stern was the Second Permanent Secretary at the UK Treasury.

Also:

Despite the fact that the chief economists have not forecast growth in US vehicle sales in 2007, after 16.5 million units were sold in 2006, they were more optimistic about their outlook than many Wall Street analysts.

But Ford's chief economist Ms Hughes-Cromwick said there was little to link house prices and auto sales.

The problem is not that housing prices or other economic metrics are up or down, or where fuel costs are. It's that you're making a bad product. If you check out last year's top ten resale values in cars, you'll see two Hondas, three Toyotas, an Acura, the Mini, a Porsche, a Land Rover, and a Mercedes. Chrysler could make a claim for the Mercedes on this list, although Mr. Jolissaint had this to say about the Daimler branch of Daimler-Chrysler:

He said that he had been surprised by how much support there had been in the Daimler office in Stuttgart for these "quasi-hysterical" policies that smacked of "Chicken Little" politics - referring to the US children's story in which Chicken Little runs around in circles saying "the sky is falling".

Foreign companies are taking over the world and American markets because American auto companies have inept business models and make products that don't hold their value. This is why all of the "big three" saw losses in 2006 and why I don't really trust their economists' take on the climate.

If I worked at one of these companies, I'd be really upset to have these folks dragging me down, though.

BBC article

The canonical "three Rs" of sound resource management are reduce, reuse and recycle.

The European Space Agency is applying this in a very clever way to providing satellite radio service to people on the ground.

Although broadcast television satellites are quite well built, they typically run out of fuel in a decade or so. Unable to correct their position, they drift -- making them useless for television broadcasting. However, if you could track them, you could still use them as a broadcast source.

The ground system developed by the ESA takes advantage of these satellites' durability by placing a tracking receiver, tied to a cache, into a car on the ground. The receiver can then maintain signal as the car drives, precaching signal for those times when the car goes through a tunnel or otherwise loses the feed -- just as modern "skip-proof" CD players precache music so they can keep playing evenly as you smack over a speed bump.

Should this go into wide use, it will represent an impressive reuse of "obselete" space systems, with the dual benefits of reducing the need for new systems and the expense of providing this type of service.

We've introduced a lot of infrastructure into the world, and we tend to drop it long before it actually becomes useless. Adaptations like this are part of our new wave of combined fiscal and environmental responsibility.

BBC article

Star player of the manslaughter-prone lethal tetrad, Paul Wolfowitz, has taken a break from his world tour promoting privatization as the cure to all ills to get into serious trouble over his own corruption.

Given that he was rewarded for his American-killing incompetence with a job heading the World Bank, it's no surprise that Wolfowitz thinks nepotism is okay.

Earlier it was revealed that he had directly intervened in the arrangements for Ms Riza’s transfer to the US State Department in mid-2005 to avoid a conflict of interest after his contentious appointment as head of the World Bank at the behest of the White House. Under World Bank rules, staff are banned for working under the direction of a colleague with whom they are romantically involved.

Details emerged of a memorandum from Mr Wolfowitz instructing Xavier Coll, the Bank’s human resources head, over the terms for Ms Riza’s secondment. This led to her being given an exceptional salary rise and enhanced annual pay awards, lifting her earnings to $193,000 (£97,600) a year tax-free — an $61,000 rise overall. The memo also set out arrangements for her promotion.

He'll probably keep this job, and get to keep up his policy of following his beliefs over reality, no matter how many people die as reality proves him wrong.

The Times Online
al Jazeera article

In early 2006, the German government reportedly paid a significant fee to an informant within the banking system of Liechtenstein for a list of names of wealthy Germans with funds hidden within the Principality's opaque financial structures. Following reports of a similar "list purchase" the the government of the United Kingdom, now a host of nations are investigating the involvement of their own wealthy tax dodgers in this country that's smaller than most American cities and mid-sized towns.

German prosecutors said the homes and offices of 150 suspects had been raided and trusts worth 200m euros (£150m) were being examined.

Swiss bank Vontobel has been privately implicated as being involved, a claim they deny. You can read Vontobel's statement on the matter here. Interestingly, the only official statement from Vontobel confirms that their client data is not being used improperly by German authorities, rather than commenting on the possible involvement of Vontobel in aiding tax evasion.

The Organization for Economic Co-Operation and Development lists Liechtenstein on its very short list of uncooperative tax havens, along with fellow teeny states Andorra and Monaco.

BBC article

Leonid Fedun, vice president of Russian oil giant Lukoil recently indicated that without major spending on new reserves, Russian oil production could be expected to fall off sharply in the next decade.

In fact, Russian oil output fell for the first time at the beginning of this year, primarily on the back of poor weather and supply issues in Western Siberia. However, the larger problem of the depletion of proven reserves is one that will severely limit Russian oil production in the near future as long as no money is directed into developing new reserves.

Analysts at Citigroup recently said annual increases in Russian output could "no longer be taken for granted" but argued that production was expected to rise until 2012.

"I believe the decline will continue for quite a number of years."

This is not strictly a peak oil issue, in that it is understood that additional oil reserves assuredly exist in Siberia. However, high taxes and a lack of financial incentives to explore for new reserves means that companies have been avoiding extra costs and simply leaning on their available oil fields. As a consequence, the Russian oil industry may hit the bottom of its collective barrel without any replacement in sight.

BBC article

Managing to hit a mark several thousand times lower than the auditing failures at the DCAA, up to a third of employees of the Department of the Interior's Minerals Management Service Royalty-In-Kind program opted themselves right out of government ethics rules, accepting gifts, drugs, and sex from oil company employees. Let's let the official report speak to this point:

In the other two cases, the results of our investigation reveal a program tasked with implementing a "business model" program. As such, Royalty in Kind (RIK) marketers donned a private sector approach to essentially everything they did. This included effectively opting themselves out of the Ethics in Government Act, both in practice, and, at one point, even explored doing so by policy or regulation.

We also discovered a culture of substance abuse and promiscuity in the RIK program - both within the program, including a supervisor, Greg Smith, who engaged in illegal drug use and had sexual relations with subordinates, and in consort with industry. Internally, several staff admitted to illegal drug use as well as illicit sexual encounters. Alcohol abuse appears to have been a problem when RIK staff socialized with industry. For example, two RIK staff accepted lodging from industry after industry events because they were too intoxicated to drive home or to their hotel. These same RIK marketers also engaged in brief sexual relationships with industry contacts. Sexual relationships with prohibited sources cannot, by definition, be arms-length.

Interestingly, the Public Integrity Section at the Department of Justice declined to prosecute cases against two of the implicated employees, including the "Greg Smith" in the preceding paragraph. As this case has the requisite "sex and drugs" aspect to keep it in the headlines for a while, perhaps DoJ will comment on why they chose not to prosecute obvious ethics violations already backed by a two-year investigation.

We should also ask DoJ to investigate Chevron's failure to cooperate with the investigation. Perhaps Chevron was applying "The Power of Human Energy" to efforts to corrupt the Royalty-In-Kind program, and wants to keep their proprietary methods secret for the next crop of new MMS staffers.

We'll leave Inspector General Earl Devaney with the final word here:

The remaining current employees await your discretion in imposing corrective administrative action. Others have escaped potential administrative action by departing from federal service, with the usual celebratory send-offs that allegedly highlighted the impeccable service these individuals had given to the Federal Government. Our reports belie this notion.

CNN article
BBC article

The "sex, drugs, and bribes!" scandal at the Department of the Interior's Minerals Management Service has already rolled out of sight at CNN, blown out of the water by some political interviews and (more reasonably) a gigantic hurricane. Today, however, the GAO, in its quiet way, shed some light on the impact of having a bunch of frat boys and sorority girls running parts of MMS in its report titled Mineral Revenues: Data Management Problems and Reliance on Self-Reported Data for Compliance Efforts Put MMS Royalty Collections at Risk.

In the original CNN article reporting on the scandal, current MMS head Randall Luthi is cited as saying that the public had not suffered any financial losses as a result of employees taking gifts, sharing narcotics, and engaging in sexual activities with oil industry reps.

The GAO might differ on that.

In this report, GAO shows how the MMS has been letting its monitoring of oil company royalties slip over the past several years. It starts with screwed up inspections:

Neither BLM nor OEMM is meeting statutory obligations or agency targets for conducting inspections of certain leases and metering equipment used to measure oil and gas production, raising uncertainty about the accuracy of oil and gas measurement. Moreover, when these inspections have been conducted, BLM and OEMM have at times recorded inspections inaccurately in their databases.

In fact, many of the inspections are not being done at all.

More disconcertingly, and yet fitting with the top-down message of the last eight years of the executive branch, is the fact that MMS has increasingly shifted from audits to compliance reviews:

MMS has historically relied on audits to determine whether a company accurately paid its royalties by examining third-party documents that contained information on prices, volumes, and deductions. More recently, MMS has transitioned to relying heavily on compliance reviews that assess whether the royalties paid by a company are reasonable, and do not always include an examination of third-party documents.

Whereas an audit involves checking third-party documentation and evidence -- that is, materials not provided directly by the oil company -- to determine if an oil company is accurately reporting production, compliance reviews involve looking at the production reported by the oil company and saying, "Yup. Seems reasonable." According to the GAO report, this preference for compliance reviews comes from the fact that they are -- naturally -- much faster, letting MMS managers more easily hit performance goals. This is sounding a lot like the failures over at the DCAA. MMS has also eased its workload by reviewing the same companies year after year, with the consequence that some companies may go years between even compliance reviews.

So let's revisit Luthi's claim that no financial losses came about due to the Royalty-In-Kind program being drinking buddies with Chevron and the rest. As GAO reveals to us, the state of MMS royalty inspections are so poor that we'd be hard-pressed to say whether there's been financial loss or not.

I read one entertaining editorial piece that suggested the wacky promiscuity at MMS was a consequence of Bill Clinton's behavior in office. Risible, but there you go. I'll reflect that concept into a more realistic application, however, and argue that an upper executive branch culture of no-bid contracts, a discounting of auditing, and a belief that the free market will magically take care of everything has generated a top-down crumbling of ethical and performance standards, such that we see MMS moving away from genuine audits and toward ticket-punching signing off on paperwork shuttled straight over from the folks who are pulling in the profits from land you own.

It's all a touch frustrating.

One of the questions that came out of the recent scandal at the Royalty-In-Kind program at the Minerals Management Service was why the Department of Justice has not prosecuted the various ethics violations found by the Inspector General's investigation. Given that royalty collection oversight has been slipping badly for the last couple years, it seems like it might be worthwhile to follow up on claims of problems or corruption with standing or former officials in such a lucrative area as Minerals Management.

As it happens, DoJ has been prosecuting other, unrelated corruption cases coming out of the MMS. In this press release from last week, DoJ tells us about guilty pleas by two former MMS employees who set up new contracts and jobs for themselves, then left MMS and government service to take those jobs. Specifically, one employee set up a contract's requirements, then left MMS and bid on it. The other employee set up the evaluation for the bid, helped evaluate and award the bid to the first employee...and then quit MMS and took a job as a subcontractor with the company.

It's unclear where the boundary falls for prosecutable corruption offenses here, but clearly, something is wrong at MMS.

A Ponzi scheme, if you are not familiar, is an investment fraud scheme whereby earlier investors make fantastic "returns" by being paid out with money put into the scheme by later investors. As long as new investors come in, this keeps working, and the people who are making bank on the early returns act as unwitting agents to bring in more money, as they praise the scheme's manager for his or her financial prowess.

An alleged Ponzi scheme on a fantastically grand scale has just been cracked here in the States, where former Nasdaq chair Bernard Madoff is alleged to have accrued $50 billion (that's billion) in losses as the head of a fraudulent hedge fund. The criminal complaint alleges that Madoff's hedge fund, which ostensibly managed $17.1 billion for a number of major clients was, in reality, a straight-up Ponzi operation, paying out older investors with money from more recent investors, and is, in actuality, completely insolvent.

Oops.

Mr. Madoff's lawyers don't appear to be on the same page with their client on his culpability here:

His lawyer said he would fight to get through these "unfortunate events".

...and...

On Thursday, two agents from the FBI went to his apartment.

He told them he "paid investors with money that wasn't there", that he was "broke" and "insolvent", that it "could not go on" and he expected to go to jail.

Clearly, there needs to be either better regulation or significantly more robust due diligence by major investors.

BBC article

As the Madoff scam continues to unravel, we naturally have a round of people who are involved in hedge funds pointing to governments, indicating they should have detected and stopped the fraud:

In a statement, Bramdean said: "The allegations made appear to point to a systemic failure of the regulatory and securities markets regime in the US."

(Bramdean Asset Management)

Antonio Borges, chairman of the Hedge Fund Standards Board, said the scandal highlighted the need for "robust governance practices and oversight via independent boards, which will challenge management procedures and behaviour".

I, however, am inclined to echo this sentiment:

"City figures cannot call for light touch regulation yet at the same time complain that regulators missed risks that the industry failed to spot," said Simon Morris, a partner with City law firm CMS Cameron McKenna.

"It's the unequivocal job of the fund manager to check out the bona fides of whoever they chose to pass their customers' money onto," he said.

BBC article

The "you should have regulated me better" excuse is internationally popular. We've already seen it on both sides of the Atlantic, as American and British financial executives complain that government should have kept them from wrecking themselves even while they spend the other 99% of the time vigorously complaining about regulation.

Now, over in China, one of the executives from the melamine-dosing Sanlu milk company has plead guilty while nonetheless suggesting that the Chinese government really should have prevented the problem:

Tian Wenhua, former board chairwoman and general manager of Sanlu, pleaded guilty Wednesday to her role in the scandal. She and three other executives are on trial for producing and selling fake or substandard products, according to Xinhua news agency.

In a statement distributed by her attorney on Thursday, Tian said China should consider the standards of the European Union regarding the chemical melamine. She also said other independent companies under the Sanlu umbrella produced some of the "tainted milk powder" and their leaders should also shoulder some responsibility.

Given that Sanlu was aggregating milk from a number of smaller suppliers who were individually involved in spiking diluted milk with melamine, on the face of it this claim might make sense. However, we have to remember that Sanlu received complaints for over half a year before New Zealand-based company Fonterra finally had to go through government lines to force Sanlu to officially recognize the problem. Sure, more extensive government regulation might have caught that earlier, but even sans regulation Sanlu executives knew they were receiving complaints, and could easily have run spot checks on their suppliers.

Or, more briefly, the claim that it was someone else's responsibility to make you behave ethically or rationally is reprehensible.

CNN article

Following in the wake of Madoff's multi-billion dollar scam, the SF Chronicle reports that hedge fund "manager" Alexander James Trabulse has been picked up by the FBI on allegations that rather than managing $17.6 million of investments into an improbably healthy $50 million, he'd actually converted it into the less-than-spectacular amount of $12 million, largely by investing their wealth not in the market, but in rugs, real estate, and other goodies.

According to that same Chronicle article, that initial investment of $17.6 million came in 2006, which makes it unclear how anyone would reasonably believe their investments could be worth $50 million after about two (not so great) years. Hm.

SF Chronicle article

I've wondered for a long time when someone's economic malfeasance would prompt death threats (or outright killings). It surprised me that the collapse of Enron, for example, did not lead immediately to someone taking a rifle to an Enron executive.

I'm not advocating that, incidentally. But it clearly reflects the way we assign risk and value damage, where it is easier to comprehend the damage to society of a violent criminal yet much harder for people to properly gauge the societal harm caused by people who are structurally disruptive, such as highly irresponsible financial players. Perhaps it might help to quantify the uptick in health problems and deaths caused by financial malfeasance, whether that's from individual bankruptcies leading to neglected health care or a systematic increase in West Nile virus due to home foreclosures.

The public furor this week has been, naturally, over the payout of significant bonuses to executives at crippled insurance giant AIG. Putting aside for the moment some excellent questions about why such an ineffective deal was made with them during the previous administration, consider the following from current AIG overseer Edward Liddy:

"We have to continue managing our business as a business -- taking account of the cold realities of competition for customers, for revenues and for employees," he commented. "Because of this, and because of certain legal obligations, AIG has recently made a set of compensation payments, some of which I find distasteful."

This reflects one of the general issues with a number of American corporations - high reward regardless of performance, and the concomitant illusion of a competition for talent. There's no quantitative basis for asserting that simply replacing the entire AIG executive structure with executives willing to take lower pay would significantly reduce AIG's performance (and as been noted, it would be difficult to actually reduce AIG's performance from its current position). It's reasonable to accept the assertion that AIG is competing for customers and revenue, but there's no reliable evidence that they have a performance-based need to compete for executives at the current level of remuneration.

On that topic, consider this piece by MIT's Dan Ariely, discussing his research on the impact of rewards on performance. Specifically:

The results defied conventional wisdom. The group offered the highest bonus did worse than the other two groups - in every single task. On top of that, the people offered medium bonuses performed no better or worse than those offered low bonuses.

...and...

We found that as long as the task involved only mechanical skill, bonuses worked as we usually expect: the higher the pay, the better the performance. But when the task required even rudimentary cognitive skill (as we hope investment banking does), the outcome was identical to the India study: A higher bonus on the line led to poorer performance.

In these studies, when rewards clearly were not scaling appropriately with the task and the person doing the work - when they outpaced reasonable levels - performance dropped off significantly. Ariely charitably attributes that dropoff to anxiety under the pressure of added rewards, but empirically, we don't care why it happens. We care that these out-of-scale rewards for high-level financial executives may not only be competitively unnecessary, they may actually degrade the performance of those same executives.

Can Liddy or any current AIG executive offer a quantitative comparison indicating that they wouldn't be doing just fine with individuals in the financial community who are willing to take half as much pay? A quarter? I imagine there is some level of experience required, and that we don't want, say, an expert chef taking over AIG while an AIG exec tries to run a five-star kitchen, but that doesn't mean we must accept the longstanding assertion that "this pay is required to keep top talent."

The topheavy nature of executive salaries suggests that companies as a whole have been pushed away from the lean, competitive, capitalist ideal by people with an interest in sinecure over career.

Marketwatch article at Yahoo

Especially when you do it in a recorded, archived medium.

The SEC is charging Angelo Mozilo, David Sambol, and Eric Sieracki with fraud, alleging that they misled the market when they insisted that Countrywide Financial was doing fine. Mozilo in particular receives the bonus charge of insider trading, as he earned $140 million off of his shares prior to Countrywide's collapse.

Notably, Mozilo is on record demonstrating that he was not blind to the risks:

The SEC published extracts from e-mails sent by Mr Mozilo.

"The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales," he wrote on 26 September 2006.

Thus, fraud.

BBC article

The news coverage following Google's announcement that it may be forced to leave the Chinese market has focused heavily on the declaration by Google that they will no longer censor search results for users in China. This is a convenient point of focus, and makes for easier story writing, but it doesn't cover the scope of the issues Google currently faces in China.

Or, briefly, there is a strong business case to disengage from the Chinese market if attacks on Google-hosted information are going to continue, possibly powered by the PRC government itself. Google is currently in the process of expanding its business beyond majority advertising (currently about 97% of its income) to enterprise and cloud computing style solutions. If a significant national entity is accessing Google's IP and the hosted content of Google users, this may damage the trust of current and future Google customers in the company's ability to provide safe, reliable, and most of all secure tools for their business and other needs.

Moving away from the ceding of censorship rights to the PRC is good, but Google's potential decision to leave the market altogether will necessarily be a consequence of their desire to ensure that they can provide secure services for customers in the rest of the world. Although a 30% market share in search in the PRC is impressive, that may well be worth trading off for the ability to expand their business in the rest of the world.

BBC article

People who develop processes or devices that have to operate in the real world are constrained by the fundamental physics of the universe. A mechanical engineer tasked with developing a new braking system for cars must keep in mind the amount of kinetic energy the car will have, and how much of the energy can be successfully bled away via a series of friction interactions between brake and disc, and tire and road.

We colloquially call these physical constraints "laws" because, like laws, they tell us what we can't do.

Our unfortunate human tendency is to flip this metaphor and make the mistake of assuming that our laws, the ones drafted by legislative bodies in your governments, are somehow also part of the fundamental physics of the universe.

Corporate finance attorney Rodgin Cohen was interviewed earlier this month on the BBC's Business Daily program. Mr. Cohen has been involved in a number of high-profile "save this company" negotiations in our recent financial meltdown, covering such giants as Wachovia and Lehman. He'd been asked on Business Daily to discuss current risks in the financial markets.

Take a look at this exchange between the BBC interviewer and Mr. Cohen, after Cohen expressed concern about "arsonists" in the market whose practices can actually damage the world's financial stability, mostly by their betting against certain currencies or countries.

BBC:

"But surely that's just capitalism working as capitalism does. Can you or should you try to restrain free markets?"

Cohen:

"You know, I think you should not try and restrain free markets. I think what you should try and restrain are activities which border on the edge of legality."

That's a fascinating statement, and it shows just how lost in the structure Cohen is. After all, the only reason we can have activities which are "on the edge of legality" is because we have laws relating to finance. And you know what those laws are there to do?

Restrain free markets.

Our finance laws are not fundamental physics. We have laws against insider trading because enough investors were personally damaged by that practice that they convinced their legislators and regulators to deal with it. We have Sarbanes-Oxley reporting because Paul Sarbanes and Michael Oxley co-drafted a bill that was passed by our legislative bodies and signed into law by the President.

Cohen's comment embodies the lack of clarity of thought that helps lead us to financial disasters. Our current financial and legal structures are not physical properties of the universe - we aren't stuck trying to work around them the way the mechanical engineer is limited in their attempt to build a new braking system. People who think that "the way it works now is just the way it has to work" will be fundamentally limited not only in their ability to figure out better ways to do things, but in their ability to foresee the actual risks and flaws in the current system.