The innocence of Joe Nacchio

“Also I will make justice the measuring line," we read in Isaiah after sadly reading the headlines, "and [I will make] righteousness the plummet; the hail will sweep away the refuge of lies, and the waters will overflow the hiding place" (Isa. 28:17). The rise of Joseph P. Nacchio is one of the great American success stories of the 20th century. And the demise of Joseph P. Nacchio is a turn-of-the-century nightmare for a nation and a legal system that have lost their way.

The involvement of Republican officials, moreover, in the white-collar lynching of an innocent man, not unlike the Republican lynch mob currently screaming for Congressman Doug Lamborn’s blood in El Paso County, testifies to the simultaneous manner in which the modern conservative party has lost its intellectual and moral roots and diminished its influence as a conserving political force. If America is, as French filmmaker and terrorism opponent Pierre Rehov claimed last week at a Denver event organized and promoted by our own distinguished blogmaster, “the last fortress,” it will not remain a fortress for long without a renaissance of real character and conviction within its conservative party.

The son of an Italian immigrant who worked as a Brooklyn longshoreman and bartender, Nacchio earned a B.S. in electrical engineering and an MBA from NYU, and an M.S. in Management from MIT.

Few sons of bartenders do this. Even fewer do what Nacchio went on to do both in a quarter- century at AT&T and in five years at the helm of Qwest Communications. In the wake of telecommunications deregulation in 1996, Nacchio was recruited by Phil Anschutz, the Denver business magnate, founder of Qwest, and hugely (if quietly) influential conservative, to take the telecom public and turn it from a regional Bell company into a national communications and Internet powerhouse.

Nacchio delivered in spades. Between Qwest’s 1997 IPO and 2001, the stock rose 600%.

During this period, Nacchio was made chairman of the National Security Telecommunications Advisory Committee and was granted a Top Secret security clearance. One can still find on the Internet glowing articles from the period about Nacchio, whose net worth had reached $170 million before he was 50.

Then the so-called “bubble” burst of 2001 occurred. The plunge affected the entire New Economy. Qwest stock plummeted, along with that of all its competitors. Historical stock prices for Qwest, British Telecom, Sprint, and Deutsche Telecom cement the point. Here are links for the relevant graphs:

(Qwest) http://finance.yahoo.com/q/bc?s=Q&t=my&l=off&z=m&q=l&c= (Sprint) http://finance.yahoo.com/q/bc?t=my&l=off&z=m&q=l&p=&a=&c=&s=s (British Telecom) http://finance.yahoo.com/q/bc?t=my&l=off&z=m&q=l&p=&a=&c=&s=bt (Deutsche Telecom) http://finance.yahoo.com/q/bc?t=my&l=off&z=m&q=l&p=&a=&c=&s=dt

Nacchio was no more responsible for Qwest’s plunge than his fellow telecom CEO’s were responsible for their stock plunges. Enron and Worldcom stock tanked during this same market plunge, and their management was just as blameless for it.

If there had been accounting irregularities at Qwest – there was no evidence of this, despite frenetic accusations that an incredulous Nacchio refuted – those irregularities would not have caused the stock to plunge. Accounting irregularities do not cause stock plunges. This was a market- and economy-wide degradation in future earning potential.

Nonetheless, self-serving and public-pandering SEC regulators and attorneys swept into Wall Street like a horde, assuming their easy prey guilty until proven innocent. “Insider trading” and “cooking the books” and “defrauding little old ladies of their life savings” were the self-righteous rallying cry. Insider trading was the hook and the book with which they got Nacchio.

The idea of insider trading is, of course, nonsense. Economists who still maintain an understanding of the moral principles underlying the classical free market – a dying breed indeed, such as the late Milton Friedman and Thomas Sowell -- have explained that, to the degree the nebulous idea of insider trading has any discernible meaning, it is a virtue rather than a vice. Management ownership of company stock is one of the greatest incentives to good company performance that exists, sales of stock by those insiders are a matter of public record, and such sales quicken the speed at which company information is communicated in that company’s stock price. It is restriction of insider sales which introduces inefficiency, and thus volatility, into the market and increases risk to the Little Guy.

Since insider sales can never be large enough to move stock prices by themselves and do not deceive anyone in any way, including those who buy the shares sold by the insider, the modern “insider trading” mentality amounts to an expectation that company executives must share in any stock losses of the companies they manage. Otherwise we will suspect him, or in the abominable case of Martha Stewart, her, of “insider trading” and proclaim to the world that she is a villain worthy of doing hard time.

Selling stock in a company you help manage is no different from selling a car that you, as an insider with respect to that car, believe has reached the point of being defect-prone. As long as you commit no dishonesty with respect to the person buying your car, you are engaging in a perfectly legitimate market transaction, even if you do not disclose to the buyer every opinion you have developed about the car from long use of it. Information is always asymmetric in any market. Penalizing those with the best information in the name of protecting the Little Guy is an ideal way to destroy the efficiency of a market and, by extension, the future earning power of the Little Guy.

Martha Stewart and Joe Nacchio both committed identical crimes: being successful in business and making stock sales at the right time. Their being successful in business destroyed the public sympathy to which they were rightfully entitled as they were subjected to such legal outrages. The list of other innocent victims in American business in the last 50 years who have had their lives ruined by the all-purpose “insider trading” tag is long and distinguished. And it shows no signs of abating. It is another of the many symptoms of the widespread antipathy toward business and wealth creation that accompanied the rise of the welfare state, and the concomitant loss of belief in moral capitalism, or anything moral at all, in the 20th century.

In Nacchio’s case, the judge who presided, the federal District of Colorado’s Edward Nottingham, was a Bush 41 appointee. Nottingham, telling Nacchio his crimes represented ones of “overarching greed,” sentenced him to 6 years in prison and fines amounting to over $100 million. Nacchio had already spent $40 million on a tepid legal defense that, as any defense is tempted to do when faced with an irrational witch hunt based on arbitrary, baseless charges, amounted to little more than a play for sympathy and a beg for mercy.

Some of Judge Nottingham’s statements at Nacchio’s sentencing are unbelievable: Nacchio had family and a good job in New Jersey, said Nottingham, but he came to Qwest “because he couldn’t turn it down.” Apparently, any virtuous man would have turned down an offer to be CEO of a major American firm, and Nacchio’s failure to do so just shows what a greedy creep he is. Judge Nottingham could have remained a lowly state judge, but he accepted appointment to the federal bench “because he couldn’t turn it down.”

Nottingham then taunted Nacchio, “I would bet anything Mr. Nacchio…wishes he would have walked away from Qwest in January 2001when he had a chance to do so.” Yes, Your Honor, there is little doubt he does, just as you would wish the same had you known your success would lead to such a preposterous injustice.

After the hearing, U. S. Attorney Troy Eid, a Republican appointed by a Republican, said the Nacchio case was the largest insider trading suit ever filed in the nation based on the number of counts (19), the amount of money involved, and the length of prison term. “Justice worked here,” he proudly told a crowd of news reporters and onlookers.

Thankfully, justice did eventually work in the famous case of Charles Keating, convicted in 1992 on vague charges related to the savings and loan collapses of the 1980’s – collapses driven by arbitrary and constantly changing government regulation of the banking industry, not by anything Keating did wrong. Keating was a boy scout who campaigned against pornography and donated millions to Mother Theresa, but he was steamrolled just as Nacchio was. He spent four and a half years in prison after a kangaroo trial presided over by O.J. Simpson judge Lance Ito. The 9th Circuit Court of Appeals, the nation’s most liberal appeals circuit and no friend to business, later overturned his conviction. Judge Ito, they said, had failed to instruct the jury that Keating must have criminal intent to be convicted of fraud. Ito allowed Keating to be convicted of accidentally committing fraud.

It is possible the inane conviction of Nacchio, who has a wife and handicapped son, may also be overturned on appeal. But Nottingham denied Nacchio’s request to be free on bail pending appeal, meaning Nacchio would have done time for crimes he did not commit had not the 10th Circuit Court of Appeals on Aug 22 overturned this ruling by Nottingham. Two weeks after he self-righteously taunted Nacchio, it came out that a drunken Judge Nottingham had spent $3,000 at a downtown strip club and $150 on an internet dating service. (Irrelevant to the merits of this prosecution, but so much for judgmentalism about things someone can't turn down and wishes later he had.)

This is the kind of circus the American justice system has become under the onslaught of modern amoral liberalism. Rather than the executor of justice, the system is becoming a monument to injustice, and Republicans are among its chief offenders. U.S. Attorney Eid publicly lamented the 10th Circuit ruling, saying, “We hope the defendant will begin serving his sentence as soon as possible."

Pierre Rehov called America “the last fortress” because there is a legacy of moral justice here that exists nowhere else in the world. That legacy still preserves hope, but that hope will continue to fade rapidly unless somewhere, somehow basic moral sanity can be restored to a legal system that has become in many places little more than a towering refuge of lies.

Mr. Nacchio, I have no reason to think you will ever read this, but if you do, I want you to know I join the honorable Mr. Anschutz (who took the stand at trial despite his famed passion of privacy) as a character witness on your behalf. You are a decent man, and I hope you and your family know and believe and can find some comfort in that future day when "hail," in Isaiah's metaphor, will sweep away the refuge of lies, and water will overflow the hiding place of those who aggrandize themselves by calling the innocent guilty. I hope you can hold on. I hope you can believe. And I hope in that final day you will be found faithful in a Christ who atones for sinners -- for all of us -- and who ultimately bids you pass from this unjust life into the awesome presence of eternal justice.

Don’t worsen the debt binge with more easy-money booze

Writing on Aug. 17, the 30th anniversary of Elvis Presley's death, I'd have to say the US equities bull market has left the building. (And see Aug. 20 update about Fed action, below.) When people like Jim Cramer on CNBC (who are paid to be stock market cheerleaders) melt down on national TV, it's a red flag that everything isn't hunky-dory at the corner of Wall and Broad Streets. The recent weakness in the Dow Jones index is another example of what happens when government intervenes in financial and real estate markets, and doesn't let the free-market work out stupidity and excesses quickly and efficiently. I had lunch with a friend this week, and he wondered what Fed Chair Ben Bernanke and the Fed could do to make things better. I replied that there's really nothing they can do, and I explained our country's situation with this analogy:

Let's say you're partying in downtown Denver, it's 1:30AM and one of your buddies is pretty drunk. He doesn't need any more drinks – much less being behind the wheel of a car. He should get off the sauce, maybe drink water or Coke, and call it a night to let the hangover and recovery process begin. But instead, he downs three more shots of tequila. Then he takes off and drives his car recklessly (with several other passengers in tow) and crashes it into a tree.

The American economy and consumers are playing the role of your buddy, with Alan Greenspan and Ben Bernanke acting as bartenders who gave him the hooch. I've heard people say “Why doesn't the Fed and Bernanke do something about this?” The reason is that they really can't avert this financial hangover because they were the ones that caused it.

Increasing the money supply and reducing interest rates (again) is more of the same medicine that got our country in this fix. It'll temporarily relieve the financial pain, but won't get us out of it. The only remedy will be time and the repayment (or default) of enough debt in the system, and more honest-to-Pete savings and investment - which doesn't include stock or mutual fund holdings in 401k plans.

I guarantee you'll hear the financial talking heads on CNBC, Bloomberg, and mainstream media say something like “this is a great buying opportunity, and chance to get back in the market. Remember, you invest in stocks for the 'long term.'” Baloney. That's nothing more than Wall Street propaganda, and has no basis in economic or financial fact. When the Dow takes daily triple-digit hits in this short of a time frame, and a 1,000-point haircut in weeks, that's not a bullish sign to me. It reminds me of the saying: “The bull (up market) climbs up the stairs, and the bear (down market) jumps out of the window.”

Even though financial assets (like stocks and mutual funds) and real estate have appreciated quite a bit in value the past few years, it's been a false prosperity based on cheap credit and an ever-increasing money supply. Real estate values went up because scared stock investors thought it was a better deal than Wall Street, interest rates were lowered to the floor, and mortgage companies had incredibly loose lending standards. For the last several years (up until recently), if you could fog up a mirror and had a job, you could buy a house with little to no money down.

The sub-prime mortgage mess and liquidity crunch are another example in history of the start of a bust after another financial boom. Government needs to get out of the way, and let the financial hangover and subsequent recovery begin. Yes, it'll be painful in the short-term for folks who only know how to profit from up-trending stock and real estate markets. But for professional investors who are financially and economically literate, this is the start of an opportunity of a lifetime to build (or increase) your fortune.

I've said it before, and I'll say it again: If you're not financially literate already, learn to sell, learn to market, and learn to read a financial statement. Don't rely on politicians who helped get our country into this financial mess to get us out of it. Even with these economic and financial challenges, America is still a great country and the land of opportunity. The American recovery won't be led by big-government pols who want more people dependent on the state. It'll be wise, bold, and visionary leaders who can inspire folks to get the most from their God-given talents.

Start with getting the most out of your talents, then work to bring out the best in others. That's the true American way, and it's what will lead us back from the arrogance and insanity of our time.

----------------------- Update, August 20 -------------------------

Well, Ben Bernanke and the Fed poured more booze in the punchbowl Friday when the Fed lowered the discount rate by ½%. But I agree wholeheartedly with Bill Fleckenstein, who says: “The bailout (should) stop here.”

The Federal Reserve can’t really do much except delay the inevitable recession that’s coming soon to the US; no matter how badly politicians or individuals want the Fed to make it all better. America’s central bank doesn’t have magical, Svengali-like abilities to “manage” the economy – and neither does any other elected official. The Fed can only do two things: 1) Control the expansion (or contraction) of money supply and 2) Control the interest rates. That’s it.

Again, don’t rely on the Fed, President or Congress to step in and make things better. All they can (and should) do is let this financial craziness run its course, and let all the bad debt work its way out of the system. It’ll take time (several years to a decade), and it’s not the ‘Goldlilocks’ economic landing that talking heads have promised. But it’s the only way to have a true economic recovery.

'Go to the ant, thou sluggard'

(Title: Proverbs 6:6) How do ants build vast underground cities without a chief engineer? How do bees build a hive and make honey without a leader? How do swarms of migrating birds or schools of fish seem to move as one organism? An article in the current National Geographic, “Swarm Behavior”, offers insights into the question of how the simple actions of individuals add up to the complex behavior of a group -- but this 2007 author reveals an economic blind spot about what Adam Smith understood as early as 1776.

According to this article, what appears to be intelligent, coordinated behavior is actually the culmination of individuals’ actions. A school of silvery jacks appears to be one organization. No one, however, is in charge; each fish fulfilling his responsibility to stay together, go the same direction and not run into another fish. Individual locusts by instinct align their direction with others creating an army of insects systematically mowing down acre after acre of crops.

Foraging ants “know” when to leave the nest in the morning when they have encountered a sufficient number of patrolling ants returning from the night guard. If the patrollers are detained by some threat to the nest, they don’t return and foragers don’t go out. Neither patrollers nor foragers know the “big picture” yet their individual actions create an orderly and beneficial system.

In humans, swarm behavior is something like wisdom of the crowd. Take for example, horse-racing odds are calculated from the all bets before a race. They are usually correct. Stock-market prices reflect the individual decisions of a lot of people and are usually a good indicator of value.

The article goes on to provide examples of applications of swarm behavior such as Google, which relies on the accumulation of web site hits to rank pages, and Wikipedia, which contains the cumulative knowledge of thousands of writers.

The article, however, misses the greatest example of beneficial swarm behavior or crowd wisdom in humans – the free market. In the free market, the culmination of individual choices determines the price and quantity of goods and services. Nobody is in charge, yet the market works to create jobs, goods, and unprecedented wealth for the greatest number of people.

Where the market is freest, the most people enjoy the greatest wealth. Where it is most constrained, people are poorest. Desired goods grow scarce while undesirable goods pile up and gather dust. Suppressing economic freedom is like throwing a net on a school of fish; individuals can no longer act and the group is tangled in confusion. Hillary, Barack, Sen. Edwards, Mr. Gore, Speaker Pelosi... call your office.

Property rights trashed by Boulder's NIMBY plan

By Krista Kafer (krista555@msn.com) I don’t like McMansions – those pretentious, overbuilt houses parked on a crust of a yard within spitting distance of the next near-identical house. I’m not into bland or beige or three-car Garage Mahals. I’m wary of McMansion neighborhoods where I feel like I’m on the set of the Stepford Wives, only super-sized. I imagine a homeowners' association, in the dark lair of a fully finished basement, churning out smiling replica families complete with shiny-coated Weimaraners and wintergreen SUVs. Yikes! Get me out of here! Take me back to the days of my childhood when this blighted land was untilled prairie where red foxes hunted, prairie dogs barked and hawks circled on the warm summer air.

Did I mention I really don’t like McMansions? That said, however, I support an individual’s right to own one. As much as I resent the intrusion and deplore the bad taste, I support the developer’s right to build the houses. And, as much as I miss the golden fields of my youth, I support the landowner's right to sell his property to the developer. Put simply, I support property rights.

The right to property is an alienable one—that is a God-given right that government has an obligation to protect. A property owner has a right to own, lawfully use, and dispose of his property.

Obviously there are some limits. A person cannot use his property for illegal purposes like say, growing marijuana, assembling bombs, or replacing errant homeowners with responsible, well-coiffed robots. Zoning laws prohibit certain otherwise legal activities. One cannot build a porn shop next to a daycare or an oil refinery next to a neighborhood. Countless other federal, state, and local laws, ordinances and regulations dictate how land can be used. Some make even a lot of sense -- but others burden landowners unnecessarily and often without constitutionally-mandated compensation.

The latter describes a restriction under consideration by Boulder County (see “Boulder County weighs McMansion limits” in the Denver Post). Boulder County would like to limit the size of houses. Owners could get out of the limits by purchasing the development rights to preserve open space and agricultural land in the county. The loophole favors those wealthy enough to buy back from government the "privilege" of controlling their own land. This arbitrary restriction, if implemented, will surely impact current landowners wishing to sell, developers, and future homeowners by reducing the value of the land.

The restriction is nothing more than a NIMBY (Not in My Back Yard) power play by those who have control of their own property and want to control the property of others. Here in Littleton, NIMBY folks are trying to block Wal-Mart (see here for my take on that).

The local activists have me beat on intensity. They certainly hate Wal-Mart more than I dislike McMansions, and their scorn for the big box store is untempered by the irony of my Stepford fantasy. But the main difference between the NIMBY folks (whether in Littleton or Boulder) and someone myself is respect for property rights.

I may not like what people do with their property but I respect their right to legally dispose of it as they please. It's principle, and it's also self-interest, because the same property rights that protect big box store and the McMansion owner, protect the owners of that little boutique down the street and me the cottage-dweller.

Will Congress repeat Smoot-Hawley debacle?

By Brian Ochsner (baochsner@aol.com) At this time of year, Memorial Day and now D-Day, we reflect upon the sacrifices that soldiers have made for our country. It's also good to look back at our economic history, review our successes and make sure we don't repeat our mistakes. The Democrat-controlled Congress now appears bent on repeating the disastrous economic blunders of the late 1920's and early 1930's. Namely, believing that higher import tariffs and income tax rates will make our economy more robust and 'protect' American jobs and incomes from foreign competition. That's like strangling the goose who lays the golden eggs. I'll tell you which two senators are today's Smoot and Hawley, and why this kind of misguided thinking is dangerous for America's economy.

In 1930 – when the US started its descent into the Great Depression - there was a hue and cry for Congress to 'do something' to help struggling farmers and workers. Sound familiar? President Hoover urged that tariff rates be reduced to promote trade, but Senator Reed Smoot and Rep. Willis Hawley (ironically, both Republicans) introduced a bill – the Smoot-Hawley Act - that increased tariffs to record levels on over 20,000 imported goods.

The debate on tariffs started in 1929. After the stock market crash in October, enough support was garnered to pass the bill. President Hoover then reluctantly signed it on June 17, 1930. It resulted in American exports plunging by over 65%, and pushed the US economy over the proverbial cliff. You may be asking – why am I bringing this up now, and why is it relevant today?

There's been recent talk from Senators Chuck “Smoot” Schumer (D-NY) and Lindsay “Hawley” Graham (R-SC) that 'something needs to be done' to correct the large trade deficit the US has with China. Senator Graham has complained about China's 'currency manipulation' and how it's hurt South Carolina textile manufacturers.

They believe that raising tariffs on Chinese goods to 27% will 'get China's attention,' force them to revalue the Yuan to more American-friendly rates, and level the playing field for US manufacturers.

Unfortunately, this is misguided economic stupidity. Even if the US Dollar and Chinese Yuan were at a 1 to 1 ratio, the US couldn't compete with Chinese slave labor, where workers are paid a fraction of what Americans earn for the same work. Not to mention their manufacturing facilities and infrastructure are more modern than ours. We've encouraged this activity by buying billions of dollars of cheaper Chinese goods over the past few years.

China is also our second largest holder of US Treasury debt behind Japan. Our congressmen are in no position to bully or demand anything from the Chinese about the Yuan-US Dollar exchange rate (or anything else). The Chinese are very financially savvy, and they'll lower the value of the yuan to the US Dollar on their terms – not ours.

If Congress did pass this economic insanity, it would be like you going into the office of your mortgage banker (who holds your largest debt) and slapping him in the face. Chinese lending has helped prolong the positive economic growth in the US over the past few years. Asian money along with cheap US interest rates extended the American prosperity party through booming real estate values. Many owners of real estate used their property as their personal ATM, kept spending this newfound cash to keep the good times rolling.

Given our huge balance of trade deficit, we need as much exporting to other nations as possible. Enacting these import tariffs and starting a full-blown trade war is the last thing our economy needs. My hunch is that President Bush will veto these tariffs, if they make it to his desk. However, given his judgment on other issues, that's not exactly a 'slam-dunk,' as George Tenet would say.

If these tariffs are signed into law by the President (or Congress overrides Bush's veto), I'm not saying we're heading into another Great Depression. But 'Smoot-Hawley 2007' wouldn't be a shot in the arm for the American economy. If (or when) this bill comes up for a vote, tell your Senator and Congressmen to vote no.

Doing nothing is much better than doing something stupid like this.