<body><script type="text/javascript"> function setAttributeOnload(object, attribute, val) { if(window.addEventListener) { window.addEventListener('load', function(){ object[attribute] = val; }, false); } else { window.attachEvent('onload', function(){ object[attribute] = val; }); } } </script> <div id="navbar-iframe-container"></div> <script type="text/javascript" src="https://apis.google.com/js/plusone.js"></script> <script type="text/javascript"> gapi.load("gapi.iframes:gapi.iframes.style.bubble", function() { if (gapi.iframes && gapi.iframes.getContext) { gapi.iframes.getContext().openChild({ url: 'https://www.blogger.com/navbar.g?targetBlogID\x3d27708445\x26blogName\x3dWatchingTheHerd\x26publishMode\x3dPUBLISH_MODE_BLOGSPOT\x26navbarType\x3dLIGHT\x26layoutType\x3dCLASSIC\x26searchRoot\x3dhttp://watchingtheherd.blogspot.com/search\x26blogLocale\x3den\x26v\x3d2\x26homepageUrl\x3dhttp://watchingtheherd.blogspot.com/\x26vt\x3d8775860279176631146', where: document.getElementById("navbar-iframe-container"), id: "navbar-iframe" }); } }); </script>

Monday, January 22, 2007

An Alternative SOTU: 2007 Edition

It's State of the Union season in America again -- the time each year in which a constitutional obligation of the President to report on the basic health and operation of our government is used instead to distract us from chronic problems often created BY our government by promising us long lists of new solutions paid for by other people's money (the best kind of money). The ritual calls for multiple references to wildly controversial goals such as "more jobs", "safer streets", "a brighter future for our children", etc. The only absolute requirement of the ritual is that the President conclude the state of the Union is sound.

Well, maybe sound asleep.

Here's an attempt by one humble citizen to summarize an alternate perspective on the State of the Union in 2007. Forgive me if this seems little changed from the 2006 version, but many important problems remain.


The wars in Iraq and Afghanistan have failed to destroy Al Qaeda and the Taliban, have failed to produce environments which can withstand attacks on their democratic governments without American help, and have produced additional sectarian tensions which have the potential to widen the conflict and put American "allies" in different corners of the fight.

How damaging have the wars in Iraq and Afghanistan and the policies for replenishment been to our military? Think of our readiness as a spreadsheet tracking the readiness at the beginning of a year, the "spend" on actual military operations and the "buy" of replacement gear / troops. Next year's readiness is

readiness 2007 = (readiness 2006) - (spend 2006) + (buy 2006)

America's longstanding policy has been to maintain military troops and equipment that allow two separate wars on two separate fronts to be fought simultaneously. Okay, that's "2.0". For the purposes of those "planning" wars, Iraq certainly counts as one solid war. Given that Iraq turned out to be much more expensive than the Pentagon expected, let's call it about 1.2 "wars". However, our troop and equipment commitment in Afghanistan only registers "0.21" on that scale (24,000 troops in Afghanistan versus 140,000 in Iraq) (#1). That puts our "spend" at "1.41" per year. So how much new equipment are we buying to replace the equipment used up each year? Judging from comments by state governors and National Guard units, it seems clear the Pentagon is failing to replenish the gear brought to the war by Guard units. (#2) The number of batallions serving two and three tours of duty in Iraq and the redeployment of troops from Afghanistan to Iraq to staff the surge (#3) seems to make it pretty clear the "buy" figures are not keeping up with the "spend" either within the core military.

How big is the shortfall? One estimate for the total spending on the war through March 2007 at roughly $400 billion (#4) However, current estimates from the Army, Marines and National Guard put their "reset costs" at $17 billion, $12 billion and a whopping $23 billion -- $52 billion total. Those are not external estimates -- those are figures being requested BY those military branches. (#5) That puts the cumulative "buy" at $400 / $452 or 88 percent of "spend." or 1.24 for one year.

If you plug in those numbers into a crude yearly spreadsheet using the previous formula, you get something like the following estimate of our current readiness:

Readiness Burn Replace
April 2003: 2.0 1.41 1.24
April 2004: 1.83 1.41 1.24
April 2005: 1.66 1.41 1.24
April 2006: 1.49 1.41 1.24
April 2007: 1.32 1.41 1.24
April 2008: 1.15 1.41 1.24
April 2009: 0.98 1.41 1.24

In words, the above "spreadsheet" means by the time the next President takes office, the capability of our military will have been eroded to the point we can barely sustain a one-front war. Of course, this assumes we don't open any other fronts between now and then. That's not a good assumption.

Despite the peril posed to our military readiness, the Bush Administration is actively increasing the likelihood of additional military commitments by saber rattling towards Iran and Syria and actual military actions in Somalia. Details on the actual results of the Somalia attack are fuzzy. An anonymous US official stated on January 9, 2007 that the attack killed five to ten Al Qaeda targets working out of southern Somalia. Comments from the Ethiopian President indicated one of the targets killed was Fazul Abdullah Mohammed who planned the 1998 embassy bombings in Kenya and Tanzania while officials in Washington stated they had no information Fazul was eliminated. (#6)

Confused? Any attempt to identify Al Qaeda terrorists and eliminate them is an admirable goal. However, if we cannot accurately confirm what an attack accomplished ten days afterwards, it seems highly doubtful we can obtain enough actionable intelligence before an attack for a successful "surgical strike." Of course, the area involves a multitude of long-standing tribal and sectarian battles involving Christians and Muslims so any chaos we help expand with our geopolitical tinkering will fit in fabulously with the rest of our portfolio.


On the surface, the American economy in aggregate did relatively well in 2006. Approximately 2 million jobs were added and unemployment as reported by the government declined from 4.9% to 4.5%. (#7) The Dow Jones Industrial Average closed up 16.3%, the NASDAQ up 9.5% and the Standard & Poor's 500 up a whopping 26.4%. (#8)

On the negative side, troubling statistics remain. The final estimate for the 2006 budget deficit was $248 billion, down from the $290 billion estimated only three months earlier. (#9) However, the previous discussion about "reset costs" in the military is just one example of how the deficit has been artificially lowered below "true" figures beyond the normal Washington smoke and mirrors. The American trade deficit continued to rise to staggering levels and likely exceeded $717 billion for 2006, despite a vastly weaker dollar against most currencies which is supposed to make American goods more affordable overseas. (#10) Over $1.2 trillion dollars in US debt is held by just three countries ($637 billion by Japan, $346 billion by China and $224 billion by Britain). Interestingly, Japan's holdings have been declining during 2006, while China and Britain pick up the slack. (#11)

Attempting to predict exactly what the economy will do and when it will do it is futile. However, a quick review of write-ups on macro trends by investment firms is highly educational. A good example is the 2007 outlook published by Deloitte (#12) which highlights the following items:

* China's overall national savings rate is a staggering 50% of GDP
* China's consumer spending is only about 41% of GDP
* China's internal banking mechanisms are state owned and not terribly efficient
* Japan's aging population is beginning to increase spending rather than saving

These findings imply that two of our biggest creditors may likely begin spending vastly larger amounts of money internally rather than buying US debt in the coming years. In the case of China, an overheating economy operating with state run banks which may be carrying larger amounts of local bad debt than is reflected in their books could drastically slow down their economy, reducing their ability to absorb our debt. Our economy is dependent on low interest rates to allow our consumer-debt culture to thrive. That environment will vanish if interest rates rise to counteract a drop in demand for US treasuries at current rates.


The microeconomic view of the American economy looks vastly different than the macro view. A graph available on the website of the St. Louis Federal Reserve Bank shows the personal savings rate for Americans remained below 0% for the past two years, ending 2006 around minus one percent. (#13) If a negative savings rate means Americans are digging the hole deeper, the problem becomes much more frightening after considering the depth of the hole the average American has dug. While impossible to break down to the individual level, in aggregate, total household personal debt (not including each household's share of government debt) is at 130.9 percent of household disposable income. (#14)

The good news is that withdrawals from consumer home equity lines of credit slowed by $300 billion recently. The bad news is the change appears to be due to homeowners re-financing their original mortgages to take advantage of 30-year rates that are below the prime rates that drive most home equity loans. The worse news is that as consumers refinance, they are borrowing even more with the new loan -- an average of 5% more than the prior mortgage. (#15)

Cynics will argue that Americans are dependent upon borrowing to fund a lifestyle of plasma TVs, McMansions with 3-car garages and $40,000 SUVs in each stall and therefore, Americans can back away from this excess if things really went south. No big woop. The problem is that the current anemic employment growth levels are only being supported by this dangerous deficit spending. Cut off the deficit spending at the household level and job growth will vanish.


In the 2006 version of the alternative State of the Union report, I identified the following grains of sand in the figurative transmission of our democracy:

  • government agencies that are distorting / withholding information owed to the public about matters of public policy

  • government officials who have been outright purchased by special interests

  • election processes that have produced material questions of fraud in pivotal states in two consecutive Presidential elections in favor of the same candidate

Suppressing Science

In 2006, there were numerous additional reports of consistent efforts to alter or suppress government research that conflicted with official policies:

* the National Science Board formally cited concerns about suppression / distortion of government research (#16)
* mandatory screening of all public documents issued by the USGS (#17)
* Administration suppresses scientific recommendation on endangered Arizona bald eagle (#18)

The effort to suppress research findings about global climate change is indicative of the head-in-the-sand approach of the Bush administration. On January 22, 2007, just one day before the State of the Union address, a collection of 10 large multinational firms formally issued a "Call for Action" requesting a government imposed framework of emission credits. The credit concept allows firms across a variety of industries to trade the credits on an open market so that firms and industries able to most efficiently achieve emission reductions can sell their credits to other firms so the next incremental dollar spent on emission reductions goes to the entity able to make the biggest reduction/cost improvement.

This plan will likely be blasted by hard-core environmentalists due to the concept of pollution as some sort of market "right" but there ARE sound public policy arguments for allowing market mechanisms to speed the process. What's fascinating about the proposal, besides the timing, is that NONE of the corporations involved with the proposal question the impact of carbon emissions on the climate. It appears the Bush Administration EPA is the only organization with lingering doubts about global climate change.

Political Corruption

2006 was not a good year to be a corrupt politician (thank goodness).

* Rep. William Jefferson (D-LA) arrested after being videotaped accepting $100k in cash
* Rep. Bob Ney (R-OH) pleads guilty to corruption charges related to Jack Abramhoff
* Rep. Tom Delay (R-TX) resigns after being indicted for PAC money related issues
* Rep. Bob Cunningham (R-CA) convicted for accepting $2.4 million in bribes
* Rep. Mark Foley (R-FL) resigns over allegations of multiple inappropriate text messages to House pages

While these arrests, indictments and convictions couldn't have happened to a more deserving collection of the political class, virtually nothing has been done to break the cycle of fundraising and influence peddling that originates most of this behavior. The new Democratically controlled House made an initial attempt at ethics reform (an interesting oxymoron -- how do you "reform" ethics? -- you have them or you don't) but it appears the moment has been lost. Half the Senate has already announced their candidacy for President in 2008 and the other half is still mulling it over so there will be little time for serious debate on campaign finance improvements that can cure Washington's biggest disease.

Improving Election Processes

The 2006 mid-term elections ended with only two or three close Senate races (Virginia, Tennesse and Missouri), that had national impacts and few allegations of electoral oddities arose in those races. A common rhetorical question posed by conservatives after the 2006 elections was "OK, liberals, why no uproar THIS year about electronic voting fraud?", implying no one cares about faulty voting systems as long as Republican candidates lose.

WRONG. I have confidence the results of the 2006 mid-terms DID reflect the voting public's intent in the voting booth but only because the margins of actual intent were significantly larger than the margin of error (unintended or otherwise) possible in the new systems. Another situation with closer 50.9 / 49.1 margins will still produce the same doubt. Americans still deserve a more rigorous review of the machines being sold to count the votes to ensure they are not only fool-proof but hacker-proof as well. (#19) (#20)

The War In / On / Over Iraq

The year 2007 could pose the most interesting test of our democratic system since Watergate or the Great Depression. The actual war in Iraq is not only going poorly, it is going nowhere. There is no viable strategy for systematically engaging the actual terrorist enemy to eliminate them directly so we are essentially stationing soldiers in harm's way to draw fire then try to shoot where the bullets and bombs come from. Quite a tactic there. Political and sectarian divisions within Iraq are preventing any compromise that can move the country forward as a unit so the factions are choosing what's familiar --- distrust and violent revenge. At the same time, the Bush Administration seems bent on finding every opportunity to assign blame for the lack of progress on the Maliki government -- essentially declaring war on the ruling coalition we claim to be supporting. All of this is leading to a war over Iraq between the Bush Administration and, well, just about everyone.

After the mid-term election, George Bush conducted his own two month "not listening tour" of commanders in Iraq, Pentagon staff, State Department staff, Congressional members and our allies. He had to rotate out two more top commanders in Iraq to find a replacement who believed a few more troops are capable of resurrecting a success from a failure with a three-year head start. The real battlefront isn't in Baghdad, however.

The real battlefield is in Washington, DC. On one side, we have a President claiming his powers as Commander in Chief give him the right to commit additional forces to widen a war in order to win it. On another side, we have a Congress which failed to perform adequate due diligence before the war, failed to perform its oversight role throughout the war, and is now still reluctant to actively exercise the power of the purse to check the decision making of a President with a virtually perfect record of incompetence in all matters military.

On the third side of the battlefield sits the American public. Watching? Or sound asleep?


#1) http://www.csmonitor.com/2006/1220/p01s02-usmi.html

#2) http://www.nytimes.com/2006/02/27/politics/27govs.html?ex=1298696400&en=a7ec19fa9b989f54&ei=5088&partner=rssnyt&emc=rss

#3) http://www.baltimoresun.com/news/nationworld/bal-te.afghanistan07jan07,0,3288686.story?page=1&coll=bal-attack-headlines

#4) http://www.msnbc.msn.com/id/11880954/

#5) http://www.spacewar.com/reports/US_Department_Of_Defense_In_Cash_Crunch

#6) http://www.usatoday.com/news/world/2007-01-10-somalia-airstrikes_x.htm

#7) http://www.latimes.com/business/la-ex-jobs5jan06,0,3356027.story

#8) http://www.usatoday.com/money/markets/us/2006-12-29-stocks-year-end_x.htm

#9) http://www.cbpp.org/10-11-06bud.htm

#10) http://news.yahoo.com/s/afp/20070110/ts_alt_afp/useconomytrade_070110182222

#11) http://www.ustreas.gov/tic/mfh.txt

#12) http://www.deloitte.com/dtt/cda/doc/content/dtt_GlobEcon07_091506.pdf

#13) http://research.stlouisfed.org/fred2/series/PSAVERT/Custom?cs=Medium&crb=on&cf=lin&cosd=2000-01-01&coed=2006-11-01&seid2=+%3CEnter+Series+ID%3E&cg=Go

#14) http://www.americanprogress.org/issues/2006/12/economic_review.html

#15) http://www.marketwatch.com/news/story/more-homeowners-refinancing-tap-equity/story.aspx?guid=%7B2F12B44C-5425-43BD-8C4E-BA15232901E9%7D

#16) http://www.nsf.gov/nsb/meetings/2006/0509/major_actions.pdf

#17) http://www.msnbc.msn.com/id/16193443/

#18) http://www.ewire.com/display.cfm/Wire_ID/3596

#19) http://www.msnbc.msn.com/id/14825465/
#20) http://www.theregister.com/2006/05/14/diebold_e-voting_flaw/

Sunday, January 21, 2007

McCain Going Down with the Ship

Arizona Senator John McCain appeared on Meet the Press Sunday 1/21 (see #1 for video) and confirmed he will be running for President in 2008. Of course, he also rendered his presidential bid moot by virtually tying himself to the mast of the bad ship "U.S.S Iraq War" and the arrogance and denial that produced it. The interview led with commentary and questions about the value of adding troops to Iraq, the risk of jeopardizing other efforts in Afghanistan to salvage the Iraq effort, and the real willingness of the Bush administration to actually LISTEN to its military leadership. The circular logic and incoherence of McCain's defense of the current "surge" strategy at this point should sound disturbingly familiar.

First, Russert read the following excerpt from a story in The Economist:

Unless their mission is very well-defined, 20,000 troops are probably too few to make a significant difference - and may be too few under any circumstances. Adding around 20,000 to the 132,000 currently there will increase U.S. capabilities, but not enough to stabilize the country.

McCain was then asked to comment. Here's his response, verbatim:

I am concerned about it, whether it is sufficient numbers or not. I would have liked to have seen more. I looked General Petraeus in the eye and said 'is that sufficient for you to do the job?'. He assured me that he thought it was and that he had been told if he needed more he would receive them. I have great confidence in General Patraeus. I think he is one of the finest generals that our military has ever produced and he has a proven record on that -- he wrote the new army counter-insurgency manual, but do I believe that if it had been up to me, would there have been more? Yes, but one of the keys to this is get them over there quickly rather than feed them in piecemeal as some in the Pentagon would like to do today.

Russert then read some comments from a Baltimore Sun article (see #2) about an infantry battalion in Afghanistan currently protecting an area between Kabul and Kandahar that is slated to be redeployed to Iraq within weeks at a time when the Taliban is making significant progress re-establishing itself as a threat in the country. McCain replied he was unaware of the plan but he was aware of the growing threat in Afghanistan. His comment ended with this:

We have a military of 1.4 million. It seems to me we could come up with 20,000 troops without the great difficulty that apparently the Pentagon apparently feels it is. I would prefer not to take troops out of Afghanistan. I think that the new policy of expanding the Marine Corps and the Army is vital because we are going to have difficulties throughout the world and we're going to have increasing difficulties in Afghanistan which is being exacerbated by the deteriorating relations between President Karzai of Afghanistan and President Musharraf of Pakistan..

Finally, Russert read this comment from General George Casey from January 2, 2007:

The longer we in the U.S forces continue to bear the main burden of Iraq's security, it lengthens the time that the government of Iraq has to make the hard decisions about reconciliation and dealing with the militias. And the other thing is that they can continue to blame us for all of Iraq's problems, which are at base their problems.

Russert asked McCain why Bush continues to ignore his generals who have resisted adding more troops. McCain replied:

Because it was clearly a failed policy from the beginning. Many of us knew it was a failed strategy. It was based upon the mistaken belief that the Iraqi army and police would be able to take over the responsibilities far more quickly than they were able to and after the bombing of the Shi'a mosque, the crisis accelerated and we saw and are seeing a steady deterioration of the situation and if we continue as we are, we will see a complete breakdown of the situation in Iraq. .. It was a failed policy, it was pursued too long, we now have a new strategy headed by one of the finest military people we have, and I believe we can succeed but I believe that there is no doubt in retrospect and at the time that the policy that was pursued wasn't going to work.

Russert then stated that Casey is up for consideration as chief of staff of the Army and asked McCain if he supported awarding that position to Casey. McCain stated he is leaning against the nomination because of concerns he has about the message Casey's "failed leadership" would send to the rest of the US military.

Go back and read McCain's previous comments. Which leadership produced the current debacle in Iraq?

* Numerous generals resisted downsized troop plans during the war planning
* They were IGNORED by Bush and Rumsfeld during the planning
* Numerous generals asked for more troops within months of the start of the war
* They were IGNORED, removed or retired by Rumsfeld and Bush, allowing an insurgency to take root

We're now at a point where our early efforts to fight the war on a shoestring to prove Rumsfeld's fantasies about "transformation" have utterly sabotaged our ability to stabilize the country. We're at a point now where many (most?) in the military and certainly the vast majority of Americans (65% according to the most recent WSJ/NBC poll) believe adding troops amidst a civil war will at best produce no improvement while risking more American lives. At this point, the Bush Administration

* has been told by the Iraqi government it desires no more American troops
* has been told by our own military leaders that Iraq does not want them
* has rotated out the top two commanders who disagree with the new strategy
* is continuing to publicly undermine the Iraqi government via public comments
* is jeopardizing Afghanistan by borrowing troops from key areas of that effort

So Senator McCain, exactly how is ANY of this decision making process different than the one that produced this disaster in the first place? Bush is ignoring his generals by adopting this strategy in the first place so if it fails and Patraeus requests more troops, how do you know Bush will grant him the forces requested? How can we assure additional troops will be used productively by a government which resisted them in the first place? Why would we want to put more American forces inside Iraq to prop up a government while we undermine the credibility of that government by questioning its President and Parliament? How do you expect the Iraqi military to assume the primary leadership role over security without putting American forces under partial Iraqi control?

Probably the most telling aspect of McCain's appearance wasn't the substance but the tone. With the exception of one self-deprecating wisecrack about a photo of him in sunglasses in a MoveOn.org ad being run against him, most of his responses were delivered in an odd, soft monotone with a relatively slow, measured meter. Not the kind of voice that politicians try to use to demonstrate clarity and gravitas about serious issues. More like the kind of voice you'd hear from a suspect weary of restating his alibi dozens of times after seeing the mountain of evidence against him. Far from the kind of confident presence a would-be candidate for President would like to project.

Then again, it won't matter a bit. Senator McCain, you don't have a chance at the White House, nor do you deserve one.


#1) http://video.msn.com/v/us/msnbc.htm?f=00&t=s53&g=e10461f7-89e1-415c-aa58-80d1b6f8066e&p=hotvideo_m_edpicks

#2) http://www.baltimoresun.com/news/nationworld/bal-te.afghanistan07jan07,0,3288686.story?page=1&coll=bal-attack-headlines

Wednesday, January 10, 2007

Bush Summarizes His Own Failures

President Bush's address to the nation included a statement that summarized what he feels will result from our victory in Iraq:

Victory will not look like the ones our fathers and grandfathers achieved. There will be no surrender ceremony on the deck of a battleship. But victory in Iraq will bring something new in the Arab world -- a functioning democracy that polices its territory, upholds the rule of law, respects fundamental human liberties, and answers to its people. A democratic Iraq will not be perfect. But it will be a country that fights terrorists instead of harboring them -- and it will help bring a future of peace and security for our children and our grandchildren.

Read those bold items again. According to Bush, his new strategy constitutes the best (only?) chance to produce a democracy in Iraq that

1) polices its territory
2) upholds the rule of law
3) respects fundamental human liberties
4) answers to its people

The irony of choosing these indicators of success for an effort initiated by democracies who have FAILED in all of these categories in prosecuting this very war is simply astounding.

1) The United States is still clearly incapable of securing our own borders from poor day laborers seeking work harvesting lettuce or roofing McMansions, much less smart determined terrorists aiming for mayhem.

2) The United States is being led by an Administration which has repeatedly ignored decades of established precedent in legal practices involving intelligence gathering and a President who issues "signing" statements which reserve the right for the President's Administration to alter their enforcement of laws enacted by Congress as they see fit.

3) The United States, Great Britain and our allies have repeatedly engaged in extraordinary rendition of "terror suspects" from territories not within the borders of those performing the rendition to other third countries which are not the home country of the suspect so those suspects can be tortured outside any limits remotely in the range of treatment allowed by the Geneva Conventions.

4) The Bush Administration is initiating the EXPANSION of our military commitment within Iraq while it rattles sabers, fighter planes, aircraft carriers and nuclear submarines against other mideast "enemies" (Iran and Syria) and provides not-so-subliminal back-channel support (and more? -- who knows) to Somalia, essentially fanning more war across more trouble spots. All of this within two months of an election in which the American voters served a stunning rebuke to Bush's Iraq "strategy" (or lack thereof) and a do-nothing Republican-led Congress that failed to hold the Administration accountable for the flawed process that initiated the war, failed to hold the administration accountable for the flawed execution of the war, and failed to hold the military responsible for BILLIONS in fraud and outright MISSING CASH lost in the fog of incompetence.

Bush's address wasn't a speech or a summary of strategy, it was a prayer. His attempt to rope in the "Author of Liberty" as our guide through trying times should send shivers down the spine of anyone listening to or reading his words. We've already had enough "faith based initiatives" from this man. Faith based initiatives are what produced more than 3019 dead American soldiers, 47,657 wounded Americans, probably 60,000 dead Iraqi civilians, and absolutely zero improvement in the security of Iraq, the United States, or the world.

Wednesday, January 03, 2007

The WSJ: New Look, Old Blind Spot

Dow Jones updated the look and feel of The Wall Street Journal to make the content easier to read but seems to have done little to make the editorial content easier to stomach.

If you subscribe, you might want to save the January 3, 2007 issue. It could become a collector's item. First, it includes President Bush's call to Congress to help save his presidency with a helpful note at the bottom of the piece reminding the busy executive that Mr. Bush is the President of the United States. Uhhh, THANKS for that reminder.

It also contains the latest installment in a continuing series of columns by Holman Jenkins that wink at stock options backdating as a sign of honest compensation committees competing in a healthy market for executive "talent" so they attract nothing but the best and brightest to loot -- I mean lead -- their companies.

I've written about this before:

The WSJ: Wrong, Wrong, Wrong -- July 3, 2006
The WSJ: Still Wrong on Options -- July 12 2006
The WSJ: Three Strikes on Options -- August 17, 2006

and will probably have to write about it again when Jenkins writes his next installment on the desperate plight of executives struggling to survive in retirement on $20,091 a day.

In the installment for January 3, 2007, Jenkins provides a bit of an update on the backdating saga at Apple Computer but quickly reverts to his prior arguments that backdating is a ethically harmless way to provide the economic equivalent of a comforting psychological "sippy cup" to executives by ensuring their options are "in the money" during their entire vesting period.

Soooooooo... Lemme get this straight.

We have executives who are supposed to possess the cutting edge financial savvy and nerves of steel required to make decisions about BILLIONS of dollars of revenue streams denominated in dozens of world currencies, choose investment strategies for capital investment across dozens of countries with varying tax rules and depreciation rules, and select hedge fund investments to protect BILLIONS in free cash belonging to stockholders that they've decided to horde in the company treasury.

These are the same executives who need to have options granted "in the money" because they are NOT sophisticated enough deep down in their morally and ethically pure souls to understand the true economic value of an option grant worth a few piddly million dollars?

Seriously.... ARE YOU KIDDING US?

The coup de grace of Jenkins' flawed thinking is his lead paragraph which states that the four dollar jump in Apple's stock price on December 29, 2006 when the Apple board released its report and its vote of confidence in Jobs proved "the market doesn't give a hoot about options backdating."

First, the report from Apple's internal investigation was exactly that -- an internal investigation, not an external legal / criminal investigation. The board report amounted to a puzzling "no one did anything wrong and we'll never do it again" statement that stated

a) Jobs had a hand in setting some of the specific bogus favorable grant dates for grants to some subordinates
b) in many of these cases, the grants were withdrawn so no one really profited from these grants anyway
c) oh yea, in one particular case someone filed documents implying full board approval of a grant when full attendance did not occur (#1)

The admission by the board that documents about board meetings were falsified in the process of operating Apple's option grant program should put the Apple case on a new level of legal concern for authorities and financial concern for investors, yet Jenkins glosses over this for the most part.

Coincidently enough, Jenkins also has the luck to again have his piece published on a day when the news of the day refutes much of his faith in the integrity of Corporate America. In this case, on the same day Jenkins argues that shareholders don't really care about options backdating and larger issues of outsized executive compensation, the board of Home Depot announced the resignation of CEO Robert Nardelli after years of pressure from shareholders about skyrocketing pay coupled and a slumping stock. Nardelli is leaving with $210 million, $20 million of that in cash. (#2) Previously, an August 16, 2006 column coincided with stories of accounting oddities at Dell and Rambus.

Jenkins also makes the mistake of trying to identify a collective motive in the decentralized herd that is the stock market by claiming the $4.00/share jump after the news was due to investors waiving off concerns about the ethical / legal lapses in the management of Apple. An equally likely (more likely?) explanation for the stock price is the following:

1) Apple's stock went from about $75/share 1/1/2006 to a peak of $93.16 during the year, making it a high gainer in the market
2) Investors dumped the stock on 12/27/2006 after hearing news of the board findings (constituting a more likely indication of investor sentiments about the board and Jobs), depressing the stock 6%
3) Mutual funds engaging in their own portfolio "apple polishing" picked up Apple shares on sale on the last day of trading in 2006 to make their portfolios look more sexy to potential investors looking at their next printed prospectus.

Investors, you cannot claim you weren't warned.


If you own stock in company A and company A's board collectively issues false information about YOUR company to you the shareholder and you continue to hold the stock without a change in the board, YOU DESERVE TO LOSE EVERY PENNY YOU HAVE. With cheerleaders like Holman Jenkins and the editorial board of The Wall Street Journal egging on Corporate America from the sidelines, you probably will.


#1) http://news.yahoo.com/s/nm/20061228/bs_nm/apple_options_dc

#2) http://biz.yahoo.com/ap/070103/home_depot_nardelli.html

Tuesday, January 02, 2007


The flurry of accusations between the left, the right, the Sunnis, the Shi'as and the tin-foil-hat faction over who could have stopped Saddam's execution until better arrangements for security had been made, who was chosen to witness the execution, how cell-phone cameras were allowed in, etc. seems utterly ridiculous.

There are at least 35 different prime-time crime scene investigation shows airing on American television. I'm guessing at least 150,000,000 Americans who watch these televised seminars on interesting ways to kill people and try to hide one's tracks all came to the same conclusion after watching the video:

Uhhhhh. DUH! If only fourteen witnesses were in the room, there's very little mystery about who could have recorded the footage. Any competent junior CSI-er would immediately be taking flashlights or brightly colored string to reconstruct the camera angles represented on the recording, trace them back to the point of the camera, then ask -- WHO WAS STANDING HERE?

If this "investigation" takes longer than 20 minutes to complete, the Iraqi Shi'as in control of most of the government will have destroyed any chance to be trusted by the former ruling Sunni minority, thus sealing the fate of the larger country.

We Americans should have thought through the symbolism of this trial and execution more carefully as well. Yes, after blowing $350 billion on the war, we have a legitimate interest in ensuring Bad Guy #1 doesn't immediately escape after capture. We also owed it to the Iraqis to help provide security for Saddam and the trial itself to keep the circus factor from reaching the logarithmic portion of the scale.

HOWEVER, once Saddam was convicted, we should have requested the Iraqi government to submit a written request to the American military that identified a date / location at which control of Saddam was to be handed over to the Iraqi government and described a process by which the Iraqis would secure the location and conditions of the sentence. The execution itself should have been conducted by Iraqi personnel at an Iraqi controlled facility not co-located with any American military presence. As it is, it APPEARS as though WE handed Saddam over at the very last minute which pretty much makes it look like WE decided when / how the details of the execution would occur rather than the Iraqis.

I don't think ANYONE in our government or military is guilty of ANY actual active "offense" or nefarious motive in letting the Iraqis do this. However, it seems clear no one on our side is thinking this stuff through to ensure we wind up the proper political distance away when our new democratic partner stubs their own toe on issues that truly are their responsibility. Our fingerprints are on enough dumb decisions in Iraq as it is. We don't need THEIR to-be-expected incompetence making us look any worse.