ProfessorBainbridge.com

Laube on Taber on the Judgment of Paris

From the Wine Spectator:

Thirty years ago, as the U.S. prepared to celebrate its bicentennial, a showdown between French and Californian wines in Paris resulted in one of those "man bites dog" stories.

In a blind tasting, a panel of French experts compared Napa Valley Chardonnays with white Burgundies, and Napa Cabernet Sauvignons with red Bordeaux. The upstart Americans—"the kids from the sticks"—won both flights, led by a 1973 Chardonnay from Chateau Montelena (a blend of Napa and Alexander Valley grapes) and a 1973 Napa Valley Cabernet from Stag's Leap Wine Cellars. ...

Judgment of Paris is an intelligently written, well-researched, smooth-paced account of the events leading up to the tasting and its aftermath. Fans of California wine will particularly enjoy the first half of the book, which follows the paths of such vintners as Warren Winiarski and Miljenko Grgich from their birthplaces to Napa Valley (where, ironically, they both had their first jobs at Lee Stewart's Souverain winery on Howell Mountain).

The story of how Winiarski's Stag's Leap Wine Cellars Cabernet, and Grgich's Chardonnay, made at Chateau Montelena, won the Paris tasting is both a "rags to riches" and "David beats Goliath" tale. Those kinds of stories help keep the American Dream alive.

Duckhorn Merlot 25th Harvest (Napa Valley) 2002

Big. Attractive drark fruit aromas. Lots of tannins, although typically supple. The label says 14.5% alcohol, but I think that estimate's a little low, given the hot aftertaste on the finish. There's some promising richness on the mid-palate. Redcurrants, cherries, and stewed plums.The pieces are there, but it needs a little time to pull things together. Grade: B++, which I'd expect to rise in a few years as it matures.

Update: It opened up a lot with air. The nose got bigger and the palate smoothed out, offering up rich berry and cherry fruit. So in the short-term, try double decanting to fully aerate it.

Silver Oak (Alexander Valley) 1998

A disappointing effort from this usually reliable Cabernet specialist, although one must take into account that 1998 was the worst vintage of the 1990s in Northern California.  Thin and low in flavor intensity. Some olives and generic dark fruits. At this price point (around $65/bottle), one expects more. Grade: C+

Ridge Merlot (Santa Cruz Mts.) 1997

This 100% Merlot is sourced from Ridge's Monte Bello estate vineyards. At age 8, it is still developing. Deep, dark ruby color. Cassis, white pepper, coffee, and toasty oak. Very, very nice, but should continue to improve through at least the end of the decade. Grade: A-

Update: Interestingly, after a couple of hours in the decanter, the flavor profile had shifted decidedly towards the woody, earthy, tobacco end of things. The flavor association that sprung to mind was a humidor into which a few fall leaves had wandered. Lovely in its way. Definitely confirms that this wine will continue to evolve a good while yet in bottle.

Judd's Hill Tasting

Yesterday, Holly and Judd Finkelstein of Judd's Hill came by for a private sit-down tasting of 5 of their wines. I must confess to having been instantly taken with them.  Judd and Holly are immediately engaging, highly personable, and intelligent people who clearly are passionate about what they're doing.

Judd's dad Art Finkelstein was a garagiste long before the term was coined. He started out back in the 1970s producing wines in the garage of his Santa Monica home.

"I became fascinated with wine and wine making and started making it in my garage in Santa Monica. I made Muscat, Zinfandel, Chardonnay whatever I could get my hands on," recalls Art. "Then I realized that I had one of the few hobbies from which one could actually make a living, so I decided to change careers." (Link)

Today, the Finkelstein family - Art and his wife Bunnie, Judd and his wife Holly - are making wine at a facility up in the hills on the east side of the Napa Valley. According to the Wine Spectator, they also have a family band on the side:

When they're not wrapped up in the stress of crush, many winemakers blow off steam through a hobby. Judd Finkelstein's just happens to be playing the ukulele. The winemaker at Judd's Hill in Napa Valley even has his own band, The Maikai Gents, which performs classic Hawaiian songs in the hapa haole style. When Finkelstein isn't busy making his family's Cabernet Sauvignon and Merlot or overseeing custom-crush clients, he and his friend Michael Tumilty can be found playing parties, resorts and clubs along with the Mysterious Miss Mauna Loa. (Not to ruin the mystery, but that would be Judd's hula-dancing wife, Holly.) They got their start in 2002 when Finkelstein couldn't find a Hawaiian band for his themed birthday party and decided to learn the ukulele so he could provide the entertainment himself. Now they've released their own 16-song CD, The Wiki Wiki Grog Shop, available for $15 at the winery. But after listening to You'll Want to Ami Ami Oni Oni Too and My Little Grass Shack in Kealakekua, Hawaii, Unfiltered started craving mai tais instead of Merlot.

As Judd described his approach to winemaking, it became clear that he is striving to make wine in the vineyard rather than the winery. He uses artisanal methods to produce handcrafted wines with minimal intervention. The grapes are picked over by hand on arrival at the winery (an advantage of being a small - 3000 cases - winery). Holly takes credit for hand-punching down the cap during fermentation. The wines are aged in French barrels, mostly neutral. They are unfined and lightly filtered before bottling.

At least in this tasting, the result is a set of red wines that bear a strong family resemblance to one another. They are all harmonious, smooth, and easy to drink right now. These are ideal restaurant wines - lots of forward fruit and supple tannins. Judd is particularly to be commended for his stated effort to keep the alcohol level in his wines down to a manageable level. Unlike a lot of California winemakers, who seem content to produce 15+% alcohol monsters, Judd tells me he aims for 13% or so. As regular readers know, high alcohol levels are a pet peeve of mine, so I was delighted to meet a California winemaker who takes a restrained approach in this area. (And, yes, a couple of percentage points really does matter.)

I didn't grade the wines as we were tasting, but on reviewing my notes I would peg them all in the high B+ to mid A- level. In other words, wines I would be very happy not only to have in my cellar but to serve to guests.

In roughly increasing order of preference, here are my tasting notes on the 5 we sampled:

Petite Sirah 2001: Sourced from Lodi area grapes, this wine is blended with a dollop of Napa Syrah. (The other 4 wines were all sourced from Napa Valley.) When it comes to Petite Sirah, I'm very old school. I like PS that turns your teeth purple, rewards an investment in antihistamines, and requires Krupp steel plating for your liver. I'd guess that this wine went to a different school. It's quite smooth and supple by Petite Sirah standards. With flavors and aromas of plums, berries, and a spicy finish, this wine is remarkably easy to drink right now. It would make a very fine match for something big and spicy - barbecued ribs?

Merlot Juliana Vineyards 2001: Sourced from a Pope Valley site. Berries, cherries, and currants. Easy to like. The latest issue of the Wine Spectator scored it an 87, which strikes me about right, although maybe a point or two too low.

Syrah 2001: Now we were really cooking with gas. Interestingly, Judd didn't let me taste the first bottle of this wine that he opened. Was it corked? Judd uses natural corks and tells me that he thinks that TCA taint can be limited by winery practices. I agree that a substantial percentage of corked wines result not from tainted corks, but rather from the interaction of wood surfaces in the winery and chlorine-based cleaners. For wines like these, which seem designed mainly for short- to medium-term consumption, however, why not just avoid the whole issue with alternative stoppers? In any case, the bottle we tasted was impressive. Rich, forward fruit. Blackberry city. The herbal notes on the finish suggest that this wine might make a very interesting match for my Lamb Wellington recipe.

BTW, since this was my first chance to collar a California winemaker since I got back from Australia, I used the opportunity to do a little proselytizing on behalf of my new passion for sparkling red wines. I gave Judd and Holly a bottle of one of my favorite Sparkling Shirazes in hopes of inspiring them to experiment with this style. I'd guess that their Syrah would make a killer sparkler. It's got the ideal mix of forward fruit and smooth tannins for this purpose.

BTW2, I used this wine to test out my new Reidel O Shiraz/Syrah tumblers. We tasted the wine in both the tumblers and my Spiegelau Cabernet glasses. We all liked the Reidel tumblers. I thought they emphasized the wine's forward fruit characteristics to a considerably greater degree than the Spiegelaus did. To my taste, it proved once again that matching glass shapes to specific wine varieties is more than just a marketing gimmick.

Cabernet Sauvignon 2001: This wine includes dollops of Merlot and Cabernet Franc. It's a mixture of grapes from the Finkelsteins' estate vineyard and those from contract growers from several other Napa Valley sites. Unlike a lot of Cabs from the east side of the valley, this wine isn't at all jammy. Instead, it's a well-balanced and graceful mix of black cherries, blackcurrants, mocha, earthy spices (nutmegs and cloves, perhaps?), and smoky/toasty oak. The supple tannins make it easy to drink now, but there's enough structure to support several years in the cellar.

Estate 2001: A Cabernet Sauvignon-dominated blend that includes Merlot and Cabernet Franc sourced from the Finkelsteins' estate vineyard. The wine of the tasting, as befits their flagship wine.  Harmonious and well-balanced. There's enough tannins and acids to justify medium-term cellaring, but it's sufficiently supple to permit current enjoyment. Cassis, blackcurrants, and cherries. Lovely. Judd and Holly left this bottle with me, which I drank a couple of hours later with a steak slathered in A-1 Sauce. It had more than enough forward fruit power to stand up to that intensely flavored condiment.

Followup on Frist's HCA Stock Trade

The WaPo is now explicitly raising the question of whether Senate majority leader Bill Frist committed insider trading in connection with his June sale of HCA stock:

The timing ... raised questions about whether Frist had somehow traded on information he obtained in advance from the company. "Frist has been in the Senate for many years now, and the conflict is not new," said Melanie Sloan, executive director of the watchdog group, Citizens for Responsibility and Ethics in Washington. "Why did he decide to sell it then? Why not years ago? What's changed? Did he know that the stock was about to take a fall?"

Josh Marshall asks a pertinent question:

Is Frist in some real trouble over this? And if he is, who can explain how a guy with such vaunting ambitions for higher office would do something so foolish and, it would appear, easy to detect?

The Democrat Party's official blog hopes "the SEC takes the question seriously." Meanwhile, the Cunning Realist makes an interesting connection between this dal and the losses Frist's campaign fund previously suffered in the stock market, asking: "Did Frist's ongoing painful experience with losses in his campaign fund cause him to "panic first" when it came to his own wallet?"

One would think a heart surgeon would be smart enough to have avoided even the appearance of impropriety, let alone actual malfeasance, but smart people routinely do really stupid things when it comes to insider trading. Who can forget the way former ImClone CEO Sam Waksal dumped his ImClone stock - and told members of his family to do the same - immediately after hearing from the FDA that the firm's drug wasn't going to be approved for sale. Did he really think nobody at the SEC would notice a little thing like a huge stock dump by the firm's CEO right before an adverse FDA announcement?

Anyway, I discussed the relevant legal issues applicable to Frist's trade in my post Frist's HCA Stock Sale: Insider Trading?. You might also want to check out an oldie but a goodie: Senators and Insider Trading.

Director Compensation as a Constraint on Executive Compensation

In my review of Lucian Bebchuk and Jesse Fried's book Pay Without Performance, I noted their argument that outside directors fail to act as an effective constraint on management:

According to Bebchuk and Fried, boards of directors -- even those nominally independent of management -- have strong incentives to acquiesce in executive compensation that pays managers rents (i.e., amounts in excess of the compensation management would receive if the board had bargained with them at arms'-length). Among these are: Directors often are chosen de facto by the CEO. Once a director is on the board, pay and other incentives give the director a strong interest in being reelected; in turn, due to the CEO's considerable influence over selection of the board slate, this gives directors an incentive to stay on the CEO's good side. Directors who work closely with top management develop feelings of loyalty and affection for those managers, as well as becoming inculcated with norms of collegiality and team spirit, which induce directors to "go along" with bloated pay packages. Finally, Bebchuk and Fried argue that those few directors who resist these incentives and seek to put shareholder interests first face a number of obstacles in both the law and practice of corporate governance.

I rejected this argument, pointing out that outside directors have countervailing incentives that encourage them to effectively oversee management. A new research paper on Director Compensation and Board Effectiveness lends considerable support to my argument:

The increase in director incentive compensation in recent years has potentially created greater alignment between directors and owners. Focusing on corporate financing and dividend policies, this paper examines the effect of compensation structure of outside directors on the reliability of financial information; managers' overinvestment and entrenchment behavior; CEO influence on the board and the riskiness of the investment strategy. The results suggest that director stock options not only align the interests of directors and shareholders that manifest in improving the reliability of financial information and monitoring of management but also align their risk preferences that result in adopting riskier investment strategies. In addition, the paper argues that, whereas CEO stock options are used along side other control mechanisms to reduce the agency problem between managers and owners, director stock options are used as substitutes for these other mechanisms. Overall, the results are consistent with the argument that incentive compensation to outside directors promotes board effectiveness and inconsistent with the claim that boards are inactive monitoring institutions.

It may not be "Game. Set. Match.," but you can definitely score one for my side of this debate.

Anabtawi on Shareholder Primacy

My friend and UCLA law colleague Iman Anabtawi has posted a very interesting new paper - Some Skepticism about Increasing Shareholder Power - in which she explains that:

This Article examines shareholder primacists' claims that making  boards more accountable to shareholders would go a long way  toward solving the agency problem between shareholders and  managers and enhancing shareholder welfare. I argue that in the  shareholder power debate over whether to vest corporate  decisionmaking authority primarily in a firm's shareholders or  in its board of directors, shareholder primacists underplay deep  rifts among the interests of large-block shareholders - those  shareholders most likely to make use of increased shareholder  power. The argument for reapportioning decisionmaking authority  within the firm away from boards toward shareholders assumes  that shareholders are a monolith with the single, overriding  objective of maximizing share value. Some of the most  significant modern shareholders, however, have private interests  that conflict with (1) the goal of maximizing shareholder value  generally or (2) the interests of other shareholders who would  choose to maximize shareholder value differently, given their  peculiar characteristics. Such private interests may induce  influential shareholders to engage in rent-seeking behavior at  the expense of overall shareholder welfare. In light of this  possibility, which I argue is substantial, we would do well to  pause before implementing corporate governance measures designed  to further empower shareholders.

I found her analysis very helpful in working up my own recent article Shareholder Activism and Institutional Investors, which argues:

Recent years have seen a number of efforts to extend the shareholder franchise, principally so as to empower institutional investors. The logic of these proposals is that institutional investors will behave quite differently than dispersed individual investors. Because they own large blocks, and have an incentive to develop specialized expertise in making and monitoring investments, institutional investors could play a far more active role in corporate governance than dispersed individual investors traditionally have done. Institutional investors holding large blocks thus have more power to hold management accountable for actions that do not promote shareholder welfare. Their greater access to firm information, coupled with their concentrated voting power, might enable them to more actively monitor the firm's performance and to make changes in the board's composition when performance lagged.

In fact, however, institutional investor activism is rare and limited primarily to union and state or local public employee pensions. As a result, institutional investor activism has not - and cannot - prove a panacea for the pathologies of corporate governance. Activist investors pursue agendas not shared by and often in conflict with those of passive investors. Activism by investors undermines the role of the board of directors as a central decision-making body, thereby making corporate governance less effective. Finally, relying on activist institutional investors will not solve the principal-agent problem inherent in corporate governance but rather will merely shift the locus of that problem.

Dow Late Bottled Vintage Port (Portugal) 1998

Although vintage dated and barrel aged, this wine is more in the nature of a vintage character Port than a true LBV port as it will not throw a crust (likely due to filtration). Having said that, however, it is a fine dessert wine. Distinctly sweet. Plums, cherries, and violets. Grade: B/B+

Hitching Post Pinot Noir (Santa Barbara County) 2000

Since last noted in September 2003, this wine has mellowed a lot. It's still going strong, but is very drinkable now and I'm a little dubious as to whether it will get a lot better at this point. It still has that stemmy bouquet and flavor I associate with California pinot noir. Plus strawberry, rhubarb, mushrooms, and cloves. At $25/bottle, this was a real bargain. Grade:B+

Frist's HCA Stock Sale: Insider Trading?

WaPo report:

Senate Majority Leader Bill Frist, a potential presidential candidate in 2008, sold all his stock in his family's hospital corporation about two weeks before it issued a disappointing earnings report and the price fell nearly 15 percent.

Frist held an undisclosed amount of stock in Hospital Corporation of America, based in Nashville, the nation's largest for-profit hospital chain. On June 13, he instructed the trustee managing the assets to sell his HCA shares and those of his wife and children, said Amy Call, a spokeswoman for Frist.

Frist's shares were sold by July 1 and those of his wife and children by July 8, Call said. The trustee decided when to sell the shares, and the Tennessee Republican had no control over the exact time they were sold, she said. ... To keep the trust blind, Frist was not allowed to know how much HCA stock he owned, Call said, but he was allowed to ask for all of it to be sold.

Frist, a surgeon first elected to the Senate in 1994, had been criticized for maintaining the holdings while dealing with legislation affecting the medical industry and managed care. Call said the Senate Select Committee on Ethics has found nothing wrong with Frist's holdings in the company in a blind trust. ... "To avoid any appearance of a conflict of interest, Senator Frist went beyond what ethics requires and sold the stock," Call said. Asked why he had not done so before, she said, "I don't know that he's been worried about it in the past."

Insider trading is trading while in possession of material nonpublic information. Although the sale was effected by a trustee on bahelf of a blind trust, Frist could still face insider trading liability because he is the trust beneficiary and retained the power to direct the sale of trust assets.

The left half of the blogosphere is already calling for investigations or even implying guilt.

If some SEC enforcement lawyer in fact were to start looking into this, the first question will be whether Frist had material nonpublic information about HCA at the time he ordered the sale. If he had the common sense God gave gravel, the answer to that will be a resounding no. For somebody in his position to retain access to such information would exacerbate the inherent conflict of interest that arises when he deals with health care issues, as well as potentially exposing him to insider trading liability.

Assuming Frist did not possess such information, there's no legal problem with the sale.

{Related post: Senators and Insider Trading}

Let's assume for the sake of argument, however, that Frist did have such information. In that case, a very interesting doctrinal question would arise; namely, is insider trading liability under Rule 10b-5 properly premised on trading "while in possession of" or trading "on the basis of" material nonpublic information.

The distinction arises here because Frist could argue that even if he possessed material nonpublic information, he didn't trade on the basis of such information. Specifically, he could argue that his trade was motivated by a desire to resolve the long-standing conflict of interest issue and that he did so at this time as part of a process of clearing the decks for a 2008 run for President.

The discussion in the extended post of the legal issue is adapted from pages 568 to 570 of my book Corporation Law and Economics.

The SEC long has argued that trading while in knowing possession of material nonpublic information satisfies Rule 10b-5’s scienter requirement. In United States v. Teicher, the Second Circuit agreed, albeit in a passage that appears to be dictum. ...

In SEC v. Adler, the Eleventh Circuit rejected Teicher in favor of a use standard. Under Adler, “when an insider trades while in possession of material nonpublic information, a strong inference arises that such information was used by the insider in trading. The insider can attempt to rebut the inference by adducing evidence that there was no causal connection between the information and the trade—i.e., that the information was not used.” Although defendant Pegram apparently possessed material nonpublic information at the time he traded, he introduced strong evidence that he had a plan to sell company stock and that that plan predated his acquisition of the information in question. If proven at trial, evidence of such a pre-existing plan would rebut the inference of use and justify an acquittal on grounds that he lacked the requisite scienter.

The choice between Adler and Teicher is difficult. On the one hand, in adopting the Insider Trading Sanctions Act of 1984, Congress imposed treble money civil fines on those who illegally trade “while in possession” of material nonpublic information. In addition, a use standard significantly complicates the government’s burden in insider trading cases, because motivation is always harder to establish than possession, although the inference of use permitted by Adler substantially alleviates this concern. On the other hand, a number of decisions have acknowledged that a pre-existing plan and/or prior trading pattern can be introduced as an affirmative defense in insider trading cases, as such evidence tends to disprove that defendant acted with the requisite scienter. Dictum in each of the Supreme Court’s insider trading opinions also appears to endorse the use standard. In light of the Circuit split that now exists between Teicher and Adler, the Supreme Court may eventually have to resolve the conflict.

To be sure, in 2000, the SEC addressed this issue by adopting Rule 10b5-1, which states that Rule 10b-5’s prohibition of insider trading is violated whenever someone trades “on the basis of” material nonpublic information. Because one is deemed, subject to certain narrow exceptions, to have traded “on the basis of” material nonpublic information if one was aware of such information at the time of the trade, Rule 10b5-1 formally rejects the Adler position. In practice, however, the difference between Adler and Rule 10b5-1 usually should prove insignificant. On the one hand, Adler created a presumption of use when the insider was aware of material nonpublic information. Conversely, Rule 10b5-1 provides affirmative defenses for insiders who trade pursuant to a pre-existing plan, contract, or instructions. As a result, the two approaches should lead to comparable outcomes in most cases.

The Frist hypothetical, however, would seem to be one of those cases in which the validity of the Rule would matter. Under Adler, Frist could rebut the presumption of use if he persuaded the court that trade was effected so as to resolve the conflict of interest issue as part of clearing the decks for a 2008 run for President. Under the Rule, I don't see how that would absolve him. Hence, it would starkly present the question of whether the SEC had the authority to adopt the Rule.

Update: A reader emails:

One problem with the Adler test is that it allows a person to use insider info to take advantage of an "up" while still avoiding a "down".  For example,  if I had a preexisting plan to sell shares and learned via insider info that the shares were headed down, I could go ahead and sell as planned.  If however, I learned via insider info that the shares were headed up, I could postpone my sale to take advantage of the price increase.  Thus, the Adler test allows a person to take advantage of insider information under certain cirsumstances.  To create a level playing field, I believe the SEC's rule is both proper and ethical--a person who comes into possession of insider information who does not already have an irrevocable contract to buy or sell must postpone the sale until the info is public.  Under this rule, persons with plans to trade who are concerned their plans may be disrupted by coming into possession of insider info can address this concern in advance by entering into a binding contract to trade (in essense, a future), but once they have the info, they should not be permitted to trade until the info is public.

And another writes:

To me, the 10b5-2 question is even more interesting than the 10b5-1 issue. I, frankly, don't see how Frist could fit into either 10b5-1 or Adler.  How could he show there was a pre-existing plan to dump the stock at the moment he dumped it?  That is, was there a plan to sell the stock prior to the earnings release?  Why didn't he just wait to sell it after the earnings release?  Indeed, it is for this very reason that many insider trading plans have window periods for trading, with the window only open after the earnings release (or, really, the 10-Q).  And, of course, you can't adopt a "pre-existing plan" while you are in possession of material nonpublic info.

Finally, a third opined:

Frist directed a sale on June 13 at a time when other insiders were also selling.  Presumably this was because the "trading window" was open.  It was open because the insiders did not have material non-public information (unless you assume HCA was one giant fraud, and if anybody serious (as opposed to a plaintiff's lawyer) is alleging that I have missed it).  Had that trade executed on June 13, there would be no problem.  If Frist was motivated to send his letter of instruction because he saw all the Form 4s rolling across on June 3-10, then he is doing what you are supposed to do (that is, not front-running the public on the Form 4s).  Indeed, selling when the rest of the insiders sell is the compliant way to do it.  That's what all the governance gurus say if given an opportunity to bleat.  
So, it is probable that the only issue derives from the time lag between June 13 and the date of the actual sale.  If Frist's letter of instruction to his trustee was irrevocable (and reading between the lines of the news accounts it may have been), then there is a very good chance that it falls under 10b5-1 by its terms.  That takes care of the time lag.  And even if the letter doesn't precisely comply with 10b5-1, that rule is only a "safe harbor."  Failure to comply with it does not ipso facto result in liability.
 Setting aside the politics, on the facts as reported I would argue that Frist did the right thing.  He did not front-run the huge pile of Form 4s that came piling in during the first ten days of June.  That gave HCA  stockholders the opportunity to digest the fact of massive insider selling near the end of HCA's June quarter and sell ahead of Frist if they chose.  Then, Frist's trustee delayed the sale another couple of weeks, which further extended the period in which public stockholders might say, "hmmm, why are HCA executives dumping their stock like the tea in Boston Harbor?"  Finally, after giving the public much more opportunity to sell ahead of him than was required by law or morality, Frist's trustee sold.  Apart from a universal desire on the part of the press to "get" leading Republicans and the public's ignorant association of the phrase "insider trading" with crime, I don't see what the issue is.

Qupe Syrah Bien Nacido Hillside Estate (Santa Maria Valley) 1999

Medium depth ruby. Strong bouquet of tar, rubber, game, and prunes. Good mature dark fruit flavors with a deep layer of earth and mushrooms. Interesting but a little funky for my taste. Grade: B-

Hard Time and Deterrence of White Collar Crime

Ex-Tyco CEO Dennis Kozlowski and CFO Mark Swartz have each been sentenced to 8-1/3 to 25 years for stealing from Tyco. Unlike federal white collar defendants, who typically end up in one of the Club Fed minimum security prisons, Kozlowski and Swartz likely will end up doing serious hard time in a NY State maximum security facility like Attica or Sing Sing. Is that an appropriate punishment for first time white collar offenders?

Economists tell us that rational actors weigh the expected sanction in determining whether to commit crimes. Invoking that model, while also criticizing its application to non-white collar criminals, David Feige argued in the Nation that:

Put bluntly, it's not irrational to steal $10 million if the worst-case scenario is a few years in Camp Fed. But change that sentence to read Sing Sing or Attica or Pelican Bay and what emerges is a whole new calculus of crime.

In dealing with rational actors, it may well be that the conditions of confinement matter far more than the length of the sentence. ... The truth is that to most people, the prospect of even a short stint in a maximum-security prison is far more frightening than years in Camp Fed.

I think that's basically right as a matter of general deterrence (and thus respectfully would disagree with Ellen Podgor's observation that "the SHAME in the community is by far the harshest punishment felt by the white collar offender.").

Having said that, however, there are two competing considerations. First, the risk of over-deterrence. We want business executives to take risks. As we increasingly criminalize corporate governance failures, we increase the possibility that somebody eventually is going to be convicted for having taken risks that proved, with the benefit of hindsight, to be unwise. Of course, this consideration has minimal traction with respect to the sort of aggressive thievery a jury concluded Kozlowski and Swartz committed.

Second, and more pertinent to their case, general deterrence is not the only function of the law. Punishment policy also includes notions of specific deterrence and retributive justice. On those considerations, it's not clear that hard time is proportionate to the crime. Ellen Podgor blawgs:

Is this sentence necessary?  No.  The minimum would have been 1-3 years and perhaps the sentence should have been closer to that time frame.  Closer not because the crime was not wrong and should be punished, but closer because these individuals are first offenders who are unlikely to commit a crime again in the future.  Their positions of power have been stripped from them and they are unlikely to have the ability or power to ever be a menace to society again.

Stross

Greg Johnson reviews Charles Stross books The Hidden Family and Accelerando:

Taken singly, The Hidden Family and Accelerando are each highly entertaining novels, two very different stories that should each find a large audience. Taken together, published as they were in a two-month period, they are evidence of a major talent at the top of his form, a writer capable of simultaneously invoking the best of classic SF and pushing the boundaries of the field. The Hidden Family invites and lives up to comparisons to Zelazny and The Princes of Amber. Accelerando shares place with Greg Egan's Schild's Ladder as the most radical, uncompromising look yet at a future that is by definition beyond comprehension. This is writing for people who know, understand, and love science fiction. Treasure it.

I think he liked them, eh? I did too. Buy them.

The Housing Bubble and Freddie Mac and Fannie Mae

Freddie Mac and Fannie Mae are the quasi-governmental corporations that support the housing  market by securitizing mortgages. Both are highly leveraged with debt equity ratios of around 30:1. Both also benefit from an implicit government guarantee. Although the federal government technically is not obliged to bail them out if they fail, most investors believe that Congress would always bail Fannie Mae and Freddie Mac out. This has let them borrow at highly advantageous rates, which has allowed them to become far more heavily leveraged than a pure private corporation could achieve.

If there really is a housing bubble, both Freddie Mac and Fannie Mae presumably would take a major hit. Is there any alternative to a government bailout if they start down the tubes? I recently found an interesting article by law professor Richard Carnell has lots of good information on the risks we taxpayers are bearing because of Fannie Mae and Freddie Mac's borrowing habit and lousy corporate governance. He also proposes creating a mechanism for dealing with any potential insolvency on their part.

This is an issue that's been flying under everybody's radar screen, but is a key issue given the state of the housing market. Carnell's article is a good introduction to this important problem.