Sneaking Suspicions

Archives--February 17-23, 2002 (Week 7)

Commentary from a practical perspective

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This page includes posts from the site's seventh week, February 17-23, 2002 in the usual reverse order. Each week's postings are perma-linked to these pages.

February 23, 2002

The risks of flying

Yesterday’s re-opening of the Washington Monument brought back a memory of kite flying in the 1970's.

I was a full-time law student at American University, and also worked 25-30 hours per week as a drugstore clerk and occasional deliveryman. The combination didn’t leave much time for recreation, and the tight money situation also put a limit on fun things to do.

Fortunately, the District's Mall is a very pleasant setting, and at least at that time, kite flying was a legal and inexpensive option on the park grounds.

I bought a normal diamond-shaped kite and three times the normal length of string, and biked down to the Washington Monument area. The wind was blowing south from the White House toward the Jefferson Monument. In what seemed like no time the kite was very high, and way out there.

Several other kite flyers were out and about, joined by the usual crowd of tourists, including a long line waiting to enter the Washington Monument.

As I stood near Constitution Avenue, watching my kite dip and swirl, a Park Service Ranger rode up on his horse:

"Sir, the President is coming in by helicopter. You’re going to have to bring that in."

"Okay, officer."

Anxious minutes later, my kite was still several hundred feet out. I could hear the chopper engine noise growing louder. The kite would not make if back to the ground in time, but I couldn’t just cut the string, either.

I started running easterly along the street, toward the Monument, while continuing to wind the line around the handle.

As President Carter's Marine One helicopter passed overhead, my kite flew right up against the Monument, just below the windows looking out toward the Potomac River.

Neither the President nor my kite was at risk anymore.

Click here for this week's golf column.

February 22, 2002

It’s your choice--cash or credit

Governments use a variety of means to acquire a wide range of goods and services. In most cases, public agencies pay cash directly, under government contract laws and regulations. These are voluntary transactions, where companies and individuals respond to the agencies’ bid announcements and/or requests for proposals, and freely enter into compensated agreements to provide the governments what they seek.

In other cases, governments acquire what they need by using the extraordinary sovereign power of eminent domain. This is a classic example of an involuntary transaction, in that an agency can buy property for public purposes by paying just compensation, even over the objections of the property owner.

Sometimes, the tax code gives people an incentive to receive payment from the government in a different form than simple cash. As I discussed previously, landowners can gain a valuable income tax deduction by selling their real estate to the government for less than full value. The difference between what they receive in cash and what the property is worth is still recognized as compensation. It’s a completely voluntary and practical means of meeting the desires of both the government and the landowner.

Several states use an alternative tax method to acquire what they want, by enacting special tax credit legislation. There are many different tax credit programs, including those that help meet governmental conservation goals. For these public entities, acquiring or preserving open space is every bit as much a good or service for their citizens as paying a contractor to repave a highway.

Tax credits are an effective incentive to spur voluntary transactions between the property owner and the government or with a qualified non-governmental entity that agrees to keep the property in its pristine state.

For example, North Carolina has had a highly successful program since the early 1980’s. California’s tax credit statute set aside $100,000,000 in tax credits for donations of qualified lands and water for permanent preservation. Delaware enacted its tax credit program for land preservation in 1999, at 30 Del.C. Chapter 18. The 10-year experiment includes limits on the total amount of credits available, with allocation and carryover provisions. Maryland passed legislation in 2001 granting tax credits for donations of conservation easements.

The Federal government is now following the states’ lead. Last year’s tax legislation eliminated a geographical limitation on conservation easement donations. Qualifying transactions can now exclude up to $500,000 from the clutches of the federal estate tax law.

President Bush’s budget proposal takes this tax credit approach a step further. Here’s how the Office of Management and Budget describes it:

The President’s Budget also includes an incentive for private, voluntary land protection through a 50-percent capital gains tax exclusion. Private landowners who voluntarily sell land or water to a government agency or qualified conservation organization for conservation purposes are eligible for the exclusion. This incentive is another example of a cost effective, non-regulatory, market-based approach to conservation.

The President’s tax credit proposal is now under attack. A story in the February 22 Washington Times described the objections from property rights groups.

"I don't know anyone outside of environmental groups who thinks the land is better off when it is managed by the government," said Chuck Cushman, executive director of the American Land Rights Association in Washington state.

Carol LaGrasse, a member of the Property Rights Foundation of America in New York, said the incentive puts the squeeze on private landowners to sell to the government. "This is just another nail in the coffin of private-property owners in rural America. It's just terrible," Miss LaGrasse said.

A memo circulating among Western lawmakers said the tax break gives "unprecedented comparative advantage for government and nonprofit agencies over the private sector."

If passed, the tax cut "accelerates the destruction of the economy and tax-base of small and rural communities, particularly if there's high public land ownership," the memo said.

As I read the quoted critics, it became pretty obvious that they were using a standard Washington opposition strategy—if you don’t like the ends, attack the means.

I’m certain that these groups don’t oppose all tax credits as a matter of fundamental tax policy.

Their real objections are against the government’s legislative determinations to acquire open space. They recognize how useful the tax credit option can be to further the achievement of that goal. That’s why they are so vehement.

Those who call this proposal a "nail in the coffin of property owners" either ignore or forget that it’s an entirely voluntary arrangement. The nails, if there are any, are coming from inside the pine box.

What’s really wrong with that?

Reasonable minds can certainly differ on whether the Federal government should own as much land as it does. There can also be a good policy argument or two about the general merits of tax credits, at least for those of us interested in looking at who actually pays for government.

For example, treating credits and deductions as tax expenditures helps keep one clear-eyed about their real impacts.

Nonetheless, granting tax credits for conservation purposes is a fairly simple and practical method for the government to buy property on behalf of its citizens. For those who make the donations, it’s just another way to be paid for what they do.

February 21, 2002

From the Mail Bag

Dear Mr. Abbas Bundu:

Thank you so much for your intriguing e-mail, which I received last night.

It is so interesting to hear from someone with whom I have so much in common, and especially when that person offers to include me in a mutually beneficial transaction.

You write that you are a petroleum engineer with the Nigerian National Petroleum Corporation, and serve on its contract award committee. You also say that the corporation is under 

The Federal Ministry of Petroleum and Natural Resources.

That is such a coincidence. I represent engineers working for state government. In addition, I’ve drafted legislation that creates very similar corporate structures within state government.

I also note that you are apparently well connected. I gather this from the fact that you are working on a special project with

senior officials of the Federal Ministry of Finance and Office of the Accountant General of the Federation.

This is also very interesting. In the Attorney General’s Office, we also work closely with officials in other state government agencies.

As I understand your offer, you and your colleagues

quietly over-estimated on the contract for Turn Around Maintenance (TAM) of [the] Port-Harcourt petrochemical refinery in Nigeria

from the actual contract cost of $171 million, up to $190 million. You also state that because of this deliberate action,

the over-estimated value of US $19M US Dollars belongs to us and this amount is what we want to secretly transfer into your personal or company account for safe keeping and sharing.

Let me state right here that I applaud your group’s excellent initiative. Well done, lads!

Your suggestion that I should become involved in your effort to recover these excess funds is exciting news indeed. Your plan calls for me to register as

a subcontractor to the original contractors [with your corporation], so that this fund can be transferred into [my] account without hitch whatsoever.

I am also a big fan of avoiding hitches, as you may soon learn.

It should be clear by now that I am in total sympathy with your stated reasons why you need my assistance in this matter:

Our reasons of soliciting your assistance to transfer this fund to your account is owing to the policy of the Federal Government of Nigeria, the code [of] conduct debars us civil servants (Government Workers) from operating a foreign account….

As a long-time public servant myself, I also face several barriers to, shall we say, full participation in the potential side-benefits of government contracting.

Your offer is most inviting, and your generous proposal of compensation for my efforts is equally compelling. In return for assisting you and your colleagues in carrying out this false scheme, you will pay me 25% of the $19 million, or $4.75 million. You carefully set aside 5% of the total

to offset all local and foreign expenses that might be incurred for this transaction,

and only wish to recover the remaining $13.3 million for yourselves.

How could I possibly quibble over such generous terms? Please, count me in.

Nonetheless, and as I’m sure you can appreciate, with such a large sum at stake, there could be a very slight chance that this arrangement could turn out badly for either or both of us. I know that you believe that

this business is 100% risk-free

and will not implicate me. I also certainly agree with your suggestion that I should

treat this business with utmost secrecy, Confidentiality, understanding and sincerity, which this business demands.

Rest fully assured that I am treating your offer every bit as sincerely as you and your colleagues are in making it, in every respect.

However, to provide the necessary assurances, I must also respectfully suggest that as a gesture of your own good faith, we should conduct an initial face-to-face meeting, prior to taking any further steps toward obtaining the $19 million.

In my work as a Deputy Attorney General, I have found that there is no substitute for direct personal contact when engaging in multi-million dollar transactions.

Therefore, I urge you to travel to Dover, Delaware, and meet me at Room 2001 in the J. Allen Frear Federal Building, 300 South New Street, on March 15, 2002 at 9:30 a.m. It’s close by my office, so it won’t be hard to slip out to meet you.

As you will no doubt discover through your own careful research, such as you conducted when you sent me this e-mail, Room 2001 in the Frear Building happens to be the local office of the United States Federal Bureau of Investigation (FBI).

However, please do not be alarmed.

I have prior personal contacts with certain members of that agency, and as you know, they are also "government workers" just like you and me.

In fact, they agreed to assist us in this enterprise. They are making their offices available for this first meeting, as a gesture of their own personal integrity, good faith, and interest.

Please bring with you to the meeting your passport, your visa, and any other identifying contract documents or papers that would give my FBI colleagues and me the complete assurance that you are indeed the person who sent me this e-mail.

We are fully ready to work with you on this daring yet potentially profitable project. Please confirm that you will be coming to the March 15 meeting as soon as possible. My partners at the FBI can make all the arrangements to greet you with the greatest hospitality and good cheer.

Yours most sincerely,

Fritz Schranck

February 20, 2002

A short note on web hosting.

Kathy Kinsley and others noted the recent problems with Blogspot. As Steven DenBeste describes it, there's that single point of failure risk again. This note is for those bloggers considering their options.

I use, a California company. Their basic charges are $7.95/month, with a month free for a 13 month contract. For that you gain 60 MB of storage, and 5G data transfer/month, which should be fine for most text-based bloggers who don't receive "crazy traffic."

I FTP my site content from home. The service has been working fine for me thus far.

This is not a paid endorsement, and I did not sign up for their referral program.

February 20, 2002

Words of Sheer Terror: "Class, hand your homework to the person sitting next to you."

The trouble started when my parochial school teacher surprised us with the direction to hand our math worksheet booklet to the person across the aisle.

Following standard Catholic disciplinary tradition, this meant that the girls corrected the boys' homework, and vice versa.

I broke out into a cold sweat.

I hadn't done any of my homework the night before.

To make matters worse, my classmate went at her assigned task with a vengeance.

The sight of an entire page of undone math problems must have looked like a veritable treasure trove for her red marking pen. She boldly marked an X on each of the unfinished equations. My memory may be playing tricks on me, but I think she also put a large X across the entire page.

This stunning record of non-achievement did not go unnoticed by the teacher. To complete the agony, I had to bring the offending document home to show my parents.

Anyone who says spanking doesn't hurt is lying.

You can understand, then, why I have some mixed emotions about the Supreme Court's 9-0 decision yesterday in Owasso Independent School District No. 1011 v. Falvo.

The Court upheld the practice of student swapping of homework or test papers for grading, against a challenge brought by the mother of a learning-disabled son under the Family Educational Rights and Privacy Act of 1974 (FEPRA).

Justice Kennedy said the 1974 privacy act does not violate the educational techniques criticized in the suit.

"Correcting a classmate's work can be as much a part of the assignment as taking the test itself," he wrote. "It is a way to teach material again in a new context, and it helps show students how to assist and respect fellow pupils."

I could have done without some of that assistance and respect back in parochial school, thanks very much.

Whether student (or "peer") grading is appropriate happens to be one of those areas of pedagogy on which reasonable minds can differ. My wife runs a great English as a Second Language (ESL) program at Delaware Technical & Community College. She does not follow this practice in her classes. Other teachers obviously feel otherwise.

Even so, I was a bit surprised to see that someone tried to make a federal case out of this issue, and that it took a Supreme Court decision to show proper respect for the interests of local control:

We doubt Congress meant to intervene in this drastic fashion with traditional state functions. Under the Court of Appeals interpretation of FERPA, the federal power would exercise minute control over specific teaching methods and instructional dynamics in classrooms throughout the country. The Congress is not likely to have mandated this result, and we do not interpret the statute to require it.

I also wish I could say that memorable episode was the last time I didn't do my homework, but that wouldn't be true.

February 19, 2002

Enron and associates gave money to Gore and Bush campaigns. In other news, dog bites man.

The February 18 NYT online edition included a fairly breathless story by Richard Berke, describing how Enron and the troubled company's associates attempted to develop influence with both major party candidates during the 2000 presidential campaign.

In May 2000, shortly after Mr. Gore was assured of the Democratic nomination, Enron hired Sally A. Painter, a public relations executive, who drafted a "six-month action plan for Enron" for "Democratic political outreach in the 2000 presidential election," the documents show.

Further down in the story, Berke gave his worried readers the gory* details:

Former Enron officials said an important part of their strategy to win favor with the Gore campaign was a significant increase in the company's donations to Democrats. Enron documents outlined this approach; they show that in 1999 and 2000 the company gave $426,500 in so- called soft-money donations to Republicans and $362,000 to Democrats. That amounts to 54 percent to Republicans and 46 percent to Democrats. In 1997 and 1998, Enron's donations had tilted much more to Republicans — 67 percent, with Democrats getting only 33 percent.

Just over half-way through the piece, however, faithful NYT readers are told to rest easy:

There is no evidence that officials at Enron or in the Gore campaign acted improperly. [Note the absence of any reference to the Bush campaign in that sentence. No slanting here, eh?-FHS]

Once again, the NYT chose to publish all the non-news it saw fit to print.

The only thing Enron did here was follow the well-worn path of Archer Daniels Midland and thousands of other would-be seekers of influence.

If Enron had put all its eggs in one basket, that would have been news.

Instead, this piece left me with the distinct impression that the NYT is just trying to keep the Enron debacle up in the air.

It may seem like I’m picking on Berke, but at least I’m not alone. I took off after him on January 27 for that bizarre poll piece timed for release just before the State of the Union address. The next day, Kaus and Andrew Sullivan barked at him about that same bit of non-news.

Yesterday, Kaus slammed Berke yet again for a different article that ran in the Sunday NYT.

With all due respect to Berke and his editors, it might help if he worked on an authentic news story. For example, how about if he attends the First Meeting of Creditors with Enron in the upcoming bankruptcy proceedings? Should be some real fun there, even if there’s no convenient way to tie the messy details of business deals back to the Bush administration.

*Puns are fun for some of us. As one American said, "Sorry about that."

CURLING UPDATE: Apparently the sport is gaining fans south of the Mason-Dixon line, and not merely east of it.

Charles Kuffner linked to the official web site of the Houston, Texas Curling Club, complete with snapshots.

The expansion of true culture goes ever onward.

February 18, 2002

Story Time

Here is the basic structure behind securities law:

  1. Every investment tells a story.
  2. There are rules for how to tell the story.
  3. Investors must have the opportunity to learn the story.
  4. If you skip the chance to know the story, that’s your risk, and not the storytellers’, as long as they followed the rules.

The Enron debacle will eventually delve deeply into the details about each of these principles. What was told, how it was told, whether the storytellers committed material sins of commission or omission in telling it, and whether others skipped the story or only wanted to hear the ending, will come out in the shareholder litigation and the bankruptcy proceedings.

Here is how this structure works in practice:

  1. Every investment tells a story.
  2. Every week in this country, businesses and governments tell stories to potential investors.

    For example, I assist my clients when they go to the financial markets to sell transportation revenue bonds, which are special debt obligations of the State. Unlike general obligation bonds, these debt instruments are not backed by the "full faith and credit" of the State of Delaware. Instead, a set of dedicated streams of transportation-related tax and fee revenues are pledged to pay the debt service on these bonds, under the laws creating the State’s Transportation Trust Fund.

    The market likes this particular story. The State has had very good experience with TTF bonds ever since they were first issued about 15 years ago.

    Enron told thousands of stories about the investment instruments it offered to the public or to the limited class of sophisticated investors eligible for some of the opportunities.

  3. There are rules for how to tell the story.
  4. Every time these bonds are issued, thousands of trees die. The paperwork is truly daunting, but also necessary. After all, the disclosure rules must be followed.

    The Fund’s trust agreement must be amended, the underwriter arrangements must be made, and financial and legal opinions are issued. (Including one of mine.) Most important, the Preliminary and Official Statements (OS) are published.

    The OS must include the information that would be material to an investor considering the purchase of the TTF bonds. It describes who runs the place, where the money comes from to pay the debt, the debt ratios that must be maintained to assure that the money will be there, how the money will be spent with all the other sources of revenue, and a host of other critical details.

    Whenever there’s a change in my clients’ senior management, I recommend the new people read the Official Statement (OS) for the last TTF debt issue. It’s about the most handy method to quickly understand the basic outline of the Department, and how it obtains and then spends the money to handle the State’s transportation needs.

    Enron had to publish similar disclosure documents for its investors, whether in the form of prospectuses or otherwise. There are special rules for different investments, but the basic principle still applies.

    From what’s been reported thus far, Enron’s potential to emerge from bankruptcy will depend to an extraordinary degree on whether it adhered to this requirement.

  5. Investors must have the opportunity to learn the story.
  6. The securities laws assume that investors will gauge their own level of risk and act accordingly.

    You can’t make people read a prospectus or official statement. You can only make sure they have the opportunity.

    As the Enron saga plays out, no one should be surprised to learn that many investors didn’t take advantage of the disclosure rules. The excuses will outnumber the alleged victims.

  7. If you skip the chance to know the story, that’s your risk, and not the storytellers’, as long as they followed the rules.

The securities markets don’t assume that everyone takes the time to learn the story before investing. They know better than that.

Instead, millions of investors each day take risks. They use price/earnings ratios or other shorthand market pricing mechanisms to decide whether to make the investment.

At other times the herd instinct simply replaces thoughtful consideration.

A miniscule few actually take the time to read the disclosure documents. They may miss an opportunity or two in the meantime, but that’s how they handle their own sense of risk.

But that’s their decision, as is the decision by others to follow the herd.

If the folks at Enron actually adhered to the disclosure rules, and that’s a big if right now, much of the caterwauling we’re hearing right now will be simply the wailing of those unprepared to accept the risks they actually took.

If Enron’s storytelling failed to follow the law, on the other hand, the company will deserve every bit of what follows.

Congress is essentially irrelevant to this particular tale, no matter how the Congressmen preen and prance before the television cameras.

February 17, 2002

Maybe some duct tape would help

Last night's men's 1000 meter short track finals was a good lead-in to today's premier sporting event.

It's not the Olympics.

It's the Daytona 500, also brought to you by the excited folks at NBC.

The American finalist, Apolo Anton Ohno, was trying to round the final turn and maintain his slim lead. With less than 20 meters to go, four of the five skaters suddenly crashed together into a pile of dangerously sharp blades and colorful outfits.

The Australian finalist, Steven Bradbury, who was completely out of the running before the crash, managed to avoid the mess and glided in for his country's first-ever Winter Olympics gold medal.

Ohno scrambled to his feet and then fell/slid across the line for a silver medal.

The sport of short skating, therefore, shares several elements with the sport of NASCAR racing:

  • Dangerous speed
  • Multiple laps around an oval
  • Untimely crashes affecting more than one participant and the race as a whole.

As in last night's skating final, NASCAR races are often affected by a catastrophic incident. Today's race at Daytona marks the first anniversary of Dale Earnhardt's deadly crash in the final turn of the 2001 event.

Thankfully, death is a rare result of these accidents, but a NASCAR race without a crash is next to impossible.

Several years ago, I traveled north to watch the 400 mile race at the Monster Mile at Dover Downs. A rookie mistake just as the mass of cars was completing the second lap took out nearly half the field, including most of the favorites. Some were eventually able to return to the race, but they had no chance to win.

The usual media coverage of the accidents during NASCAR race includes an interview with the drivers in the garage or in the pit stop area. Sometimes their anger is obvious. More often than not, however, most seem to just shrug their shoulders and say, "That's racing."

Last night's race was too short to do much about the accident, although the announcers said that the judges could have ordered the race to be repeated if they concluded that the crash was deliberate.

For crashes in the longer races, however, maybe they could keep going under a caution flag, and use a pace skater until the green flag goes up.

Contact Information:

Fritz Schranck
P.O. Box 88
Nassau, DE  19969

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Official small print disclaimer: This is, after all, a personal web site. Any opinions or comments I express here are my own, and don't necessarily reflect the official position of my work as a government attorney or any of my clients.

That fact may become obvious later on, but it needs to be said here anyway.

Frederick H. Schranck 2002