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Balanced Fare: We Report, You Deride

Friday, July 12, 2002

Krugman on Corporate Ethics

I know, "ethics overload" with Krugman's "The Insider Game" today. Cheap shot highlights:

Today, Krugman describes the sale by Harken Energy of its subsidiary, Aloha Petroleum:

"the Aloha Petroleum deal at his former company Harken Energy — in which big profits were recorded on a sale that was paid for by the company itself, a transaction that obviously had no meaning except as a way to inflate reported earnings...

Gee, last week I read this, also from Krugman:

"A group of insiders, using money borrowed from Harken itself, paid an exorbitant price for a Harken subsidiary, Aloha Petroleum. That created a $10 million phantom profit, which hid three-quarters of the company's losses in 1989."

Gosh, if the sub was sold, that has meaning, doesn't it? And yes, it was paid for by a company loan, but this is hardly the first case of seller financing in the world. And the price was exorbitant? If they had paid too little, would that be better? If you are going to criticize Bush for changing his story, a bit of constancy is advisable. And a discussion of how insiders can earn a net gain by overpaying for an asset (transferring value to Harken Energy shareholders generally) but make it back on their proportional ownership of a stock that capitalizes earnings at an attractive multiple, might be interesting. Depending on the amount of overpayment, the proportion of shares held by participants in the transaction, and the capitalization multiple, the numbers can certainly work. But don't hold your breath waiting for our Economics Guru here to tackle it.

Krugman on prosecuting high-level execs:

"And they almost never get convicted. Accounting issues are technical enough to confuse many juries; expensive lawyers make the most of that confusion; and if all else fails, big-name executives have friends in high places who protect them.

Probably thinking of Marc Rich. I am.


"An aside: Some pundits have tried to dismiss questions about Mr. Bush's business career as unfair — it was long ago, and hence irrelevant. Yet many of these same pundits thought it was perfectly appropriate to spend seven years and $70 million investigating a failed land deal that was even further in Bill Clinton's past."

It's not the crime, it's the coverup - man, doesn't this guy read anything? With Whitewater, we had questionable Treasury involvement after Clinton was sworn in. Let loose the attack dogs of war!

"Mr. Bush claims that he was "vetted" by the S.E.C. In fact, the agency's investigation was peculiarly perfunctory."

Perhaps because the share price didn't move much the day of the announcement, and was well above his sale price next year. No harm, no foul? Byron York is endless on this. OK, back to Special K:

"And if they want something more recent, how about reporting on the story of Mr. Bush's extraordinarily lucrative investment in the Texas Rangers... As in the case of Harken, no hard work is necessary; Joe Conason laid it all out in Harper's almost two years ago."

Pulitzer's all around! Let's turn the staff loose with old magazines. Did Guccione cover this? I volunteer to check. Man, if the story is that old, why are we breathing so heavily now?

"And the general counsel, who would normally make decisions about legal action, had previously been George W. Bush's personal lawyer — he negotiated the purchase of the Texas Rangers. I am not making this up."

You're not? Well, at least you recognize a need to reassure us. I guess news of your tattered credibility has trickled back.

And Krugman's big finish:

"The bottom line is that in the last week any hopes you might have had that Mr. Bush would make a break from his past and champion desperately needed corporate reform have been dashed. Mr. Bush is not a real reformer; he just plays one on TV."

Well, the only proposed reform I found in this piece is to change the accounting for stock options. I guess my hope that Paul would make a break with his past and deliver a real economics column is equally misplaced.

UPDATE: Brad DeLong explains Aloha as a non-recourse seller financed "sale". OK, this doesn't often get "true-sale" accounting, but I suppose I could argue it is akin to the sale of a call on Aloha. So, do I retract my cheap shot on Krugman? Hey, even if he were right, truth is no defense around here - top shelf economists and crusading muckrakers not only have to be right, they have to look good doing it. Points off Krugman for no explanation. I'll even take points off DeLong for no sources or links, although I expect he has some.

OK, I may have found a source myself. The LA Times? What are you Lefty Coasters reading? And registration required? Oh well, the Post has similar details the next day, although I miss the magic words "non-recourse".

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